It's hard to imagine a worse deal. Perhaps if it included a small cut in the capital gains rate without indexation it could be viewed as even worse, in the sense that it would remove the issue from the political arena altogether. At least now there is a chance the deal can be killed in the House, behind the leadership of Minority Whip Newt Gingrich. White House Chief of Staff John Sununu has been swearing oaths all year to House Republicans that there would be no deal without a capgains cut. He has been telling them not to worry about Richard Darman's "strategy" of not publicly confronting Democratic arguments that it is a giveaway to the rich. Darman's genius would win out in the end. Their last moment abject surrender to Senate Majority Leader George Mitchell of course represents the total failure of Darman's inside game. They are publicly boasting that they "saved" the top marginal income tax rates, as if this somehow preserves the President's "no new taxes" pledge. Privately, they are blaming Senator Bob Packwood for refusing to allow them to bargain away the top rates in exchange for capital gains.
What now? There may be a vote in the Senate Friday on capital gains, if Senators Bob Kasten and Connie Mack can maneuver past Mitchell's parliamentary barriers while Senator Pat Moynihan tries to get his Social Security tax cut. But where there had been a surplus of Senate votes for capgains before the deal, it would now lose, with the President forced to oppose it according to the terms and conditions of the deal. In a grotesque political turn, the President must now oppose a capital gains cut, and if somehow the Kasten-Mack bill came to a 50-to-50 tie, Vice President Quayle would have to break the tie by voting against it!
The bigger question involves the immediate future of the capital gains proposal. Gingrich seriously believes he can kill the present pact, with a coalition of GOP and Democratic backbenchers. If the deal is not signed, sealed and delivered by October 19 it is in fact dead, and there will be plenty of shots to try to kill it between now and then. But assuming it squeaks through, which seems more probable at the moment given the arm-twisting power of the White House, does the President then announce that he still believes a capital gains cut is necessary? Does he signal to GOP candidates for the House and Senate that he'd like them to campaign on the issue, to increase its chances of passage in the next Congress? Or does he treat it as a losing issue, dropping it altogether from his agenda?
In this regard, one disturbing sign is the talk coming from Darman and Sununu about the so-called "growth package" that they are selling as an "alternative" to capital gains reduction. The worst part of the entire package, in fact, is the scheme to offer 25% tax writeoffs, up to $50,000, for investments in new equity issues of companies capitalized at less than $50 million. The scheme shows complete ignorance of the entrepreneurial dynamic. It rewards investors and their lawyers and accountants for mining this giant loophole, doing nothing for the entrepreneurial producer, who still has to pass through the tax gate to realize the fruits of his efforts. If enacted, there would be enormous incentives to reorganize corporate America to take advantage of the loophole, with little to spur new growth. The measure does nothing to address the grave problems in the financial structure of the economy that derive from the high capgains rate. It speaks to the arrogance of the White House team that they served up this clunker without even a hint of a trial balloon.
If Gingrich does succeed in killing the deal, the process switches back to the sequestration dilemma on October 19. The President could ask for a waiver of Gramm-Rudman and avoid sequestration, or permit a few weeks of austerity. By the end of the month we should have third-quarter GNP statistics that would permit suspension of the budget targets. In any case, we'd be in better shape regarding capital gains if the Big Deal went down the drain. As long as Gingrich thinks he has a shot, we have to hang in there with him.