It does not make much sense getting upset about the trial tax balloons wafting up from the Bush Administration. This is Richard Darman's way of allowing public opinion to shoot down the pet tax ideas of his associates. Darman is not about to tell Treasury Secretary Nicholas Brady that Brady's stock transfer tax is, as The Wall Street Journal put it this morning, a "wacko" idea. And Darman gets along too well with Senator Pete Domenici, ranking Republican on the Budget Committee, to tell him his B.T.U. tax — on coal, oil, gas, petroleum, nuclear power, and firewood (?) — is also wacko. There are liberal Democrats who want to tax "rich" Social Security recipients. Let's float that idea. Ways & Means Chairman Dan Rostenkowski wants a 36% marginal tax rate on income. Run it up the flagpole and see who salutes.
The message coming from the Democrat leadership continues to point to a firm insistence on higher income-tax rates at the top in exchange for a lower capital gains tax. A few of my conservative friends have been critical of my position that if this is what the Democrats really, really want, that if it is something they must have, the President should be prepared to give it to them. But at a price that reflects their eagerness to have it. If the Democrats were desperate for a 95% tax rate, they should be able to have it, at a threshold of, say, $1 million per day.
This is the position President Reagan was in during negotiations on the 1986 tax reform, when the absolute must price the Democrats put on lower marginal rates was the treatment of capital gains as ordinary income. The Kemp-Kasten plan had capgains falling to 15% from 20%. It was New Jersey's Sen. Bill Bradley, co-author of the Bradley-Gephardt plan, who insisted on the higher capgains tax. The strategic assumption on the GOP side was to take the deal and go back to the voters in 1988, to get the 15% rate. It makes just as much sense now to take a deal that pushes the top marginal rate up a few points, to 33%, as long as the income threshold is adjusted and the capgains mandate the President won in 1988, fair and square, is at least achieved.
After all, this isn't the end of history. There are elections this November for a new Congress, and 1992 gives the President and his party a chance to revisit the income-tax issue as well as capital gains. Years ago, Senator Ted Kennedy scoffed at the idea that lower rates would produce higher revenues (as his brother JFK had argued), and he asked Jack Kemp (whose initials are also JFK) if the Republican Party believed it could lower tax rates to zero. Kemp said the GOP would continue to advocate lower rates until it found itself losing elections with that position. My belief is that except for capital gains, the rates are down to reasonable levels, but the income thresholds are still too low, and that national elections could be won on this issue.
The political side of the supply-side tax revolution began in New Jersey in 1978, when Jeff Bell defeated five-term GOP Sen. Clifford Case on this issue. Now counter-revolution has begun in New Jersey. It was New Jersey's Bradley who last October led the fight to block the Bush capital gains tax cut, which caused the weakening of revenues at all levels of government. Now Democratic Governor James Florio has pushed through a doubling of the state income tax to 7% without an electoral mandate. The $2.8 billion tax increase was needed, he argued, because of weak state revenues. The GOP candidate running against Bradley this fall, Christine Todd Whitman, is bringing the issue full circle. She has been critical of Bradley's stance on capital gains and is now criticizing Bradley for failing to take a stand on the Florio tax increases, which have infuriated the state's electorate. If she keeps this up, the campaign, which Bradley was supposed to have been able to snooze through, will be one of the most interesting of the year.
I'm still not sure that Darman, before the elections, will be able to deliver a package that will have us dancing in the streets, although I'm completely confident that is his aim. Nothing I've heard in the last week suggests this confidence is misplaced. The budget summit is producing a lot of static so far and some of the trial tax balloons do look ominous. But we're still too early in the process to appreciate the strength of the President's bargaining position. After all, if the Democrats demand higher rates thinking the President cannot possibly deliver, and the President says he will, for a reasonable price, it's hard to see how the Democrats can retreat without being set up at the polls. Things are better than they seem to be.