What Kind of Deal?
Jude Wanniski
June 29, 1990


In contemplating what kind of deal President Bush might get at the Budget Summit, it is important to note that he has already put his biggest bargaining chip on the table: his willingness to be publicly humiliated on his tax pledge. In order to get a deal via the strategy Richard Darman has been pursuing, the President had to make that political concession. I've disagreed with the Darman strategy, thinking a partisan brawl would bring quicker results in getting the only thing that really matters, a cut in the capgains tax. But Darman is the strategist, and this move was absolutely necessary as part of his game plan.

Independently, Jack Kemp saw this exactly the same way, and called the President soon after the controversial statement was released, telling him he would do anything he could to make the process work. The Wall Street Journal's Washington bureau, which for 18 months has been predicting Bush would cave in on taxes, has been gleeful in presenting the story running out a whole catalog of soak-the-rich taxes Bush might consider. It also completely misread Kemp, taking a shot at him in this morning's Washington Wire, asserting that he has become an outsider in the administration for opposing the process.

To some it sounds like wishful thinking, but I believe the White House will get a good package out of the process, one way or another. The fact that the conservative clamor over the "tax revenue increases" has been so intense underscores the value of Bush's symbolic concession to the Democrats -- thereby increasing Darman's negotiating strength at the bargaining table. As far as I've been concerned, Darman can deal away symbols until the cows come home, but the cows have to come home to a deal that captures maximum growth benefits from a capgains cut.

What should Darman be prepared to give up? That of course depends on what he gets. He should not give up any more than he has on the table to get the spending cuts and budget reforms the Democrats are likely to concede. The focal point will be the income tax rates, which the Democrats will insist must rise at the highest levels if they are to concede on capgains. The negotiations, one expects, will center on the "bubble," with the Democrats insisting that it be ironed out so the top marginal rate climbs to 33% from 28%. I'd give them the whole bubble for two concessions: A 10% capital gains tax with a holding period no longer than a year, plus a doubling to $200,000 of the threshold at which the 33% rate is encountered. Any concession on the bubble must protect the taxpayer class that gave up practically all its deductions in exchange for the 28% rate. The Democrats should take such a deal, knowing it would get the tax issue off their backs in both the fall elections and in 1992. Otherwise, the 1992 GOP platform will have a 10% capital gains plank to spur international competitiveness. The Democrats will fight it again, and will lose.

If the Democrats refuse to do a deal that Darman, Mike Boskin and Jack Kemp know is going to be good for the economy, Darman's strategy will have run out of room. The President will then be able to advise the electorate that even his willingness to suffer public humiliation by bending his pledge to them has not been enough to satisfy the Democratic leaders, forcing a painful sequestration. If the Democrats think they can go into the November elections with Bush in this commanding strategic position, they will allow it to happen. Darman thinks they won't. Even if he's wrong, it looks like we will get what we are after, even if it takes a little more time.