Capgains: Back from the Dead
Jude Wanniski
October 10, 1990


Don't believe what you read in the newspapers. The President DID NOT take capital gains off the table after meeting with 17 Republican Senators who are opposed to a tradeoff on income taxes. The New York Times and The Wall Street Journal stories to that effect this morning were spun by Richard Darman, who is desperately trying to revive his Big Deal and knows he can never do so as long as the capgains idea remains alive. Even John Sununu, I'm told, has called Republican congressmen to advise them the stories are incorrect, that the President simply agreed that he would not accept the tradeoff the Democrats are offering: A 23% capgains rate for a 33% top income tax rate, plus an increase in the alternative minimum tax to 26% from 21%. Of course, such a deal is ridiculous and would be denounced by almost all Republicans in the House and Senate.

House Republicans are now crafting an alternative budget they will soon make public which includes a capgains package: A 51.6% exclusion on capgains and a smoothing of the "bubble" to a top rate of 31%, which means the capgains rate is capped at 31%. The proposal does not index future gains, but we need the extra kick of a lower rate now, and can get back later to the inflation problem. House Minority Whip Newt Gingrich is counseling his troops to present the most attractive growth package that suits their tastes, not Richard Darman's or George Mitchell's. The strategy is to draw on the same forces that defeated the summit package last week, dangling a growth-oriented package that tempts many of the same Democratic backbenchers who rebelled against the Darman Deal last week. Gingrich knows there is still grass roots support for capgains that is especially gnawing at Southern Democrats and Hi-Tech Democrats along the coasts. The GOP package will look so good compared to the summit deal that the Democratic leaders will have a hard time keeping their troops in line.

Senator Bob Packwood has been cast in today's stories as being flat out opposed to a tradeoff, but this is incorrect. Packwood is in complete agreement with Gingrich on taxes and I believe would personally cheer a solid capgains deal even if it meant going up to 31% on income tax. He simply doesn't believe anything like that is possible given the determined opposition of Senate Majority Leader George Mitchell. If Packwood would pick up on the populist fervor that Gingrich has ignited, though, he could unify the Senate Republicans, who are now evenly divided-on the idea of a capgains tradeoff. The aim is not to please Mitchell and the Democrats to "get a deal," but to unify the GOP once again behind a pro-growth strategy. It may even begin to dawn on the White House, if not on Darman, that the Republican Party can only be united under a growth banner. It was possible in the Eisenhower-Goldwater-Nixon-Ford years to more or less unite behind an austerity agenda. But the Reagan Revolution has made that impossible.

The congressional committees are now working toward the next deadline of October 21, and it should be clear that once again no deal that satisfies the House Republicans will be possible by that date. The goal, though, is to have a unified GOP, including a President who has been rescued from his Budget Director. The GOP can then hold up its growth alternative to the Democratic old-style tax-the-rich budget going into the November elections. It would be far preferable to have no budget, merely a continuing resolution, until the new Congress convenes in January, reflecting the election results that I assume would be positive.