Bullish on Capgains
Jude Wanniski
March 6, 1991


In case you had not noticed, Wall Street's celebration this week has been tracking reports out of the Bush Administration that indicate a serious push on capital gains is in the works. As we have been pointing out for several weeks, Treasury Secretary Nick Brady has become more aggressive in his support. White House Chief of Staff John Sununu has privately indicated the President will get behind a coherent strategy once one is developed and agreed upon by the GOP congressional leadership. In that regard, a serious dispute over strategy between two GOP factions, which has been holding up the show, is being settled in favor of the superior strategy.

Oddly enough, the dispute divided House Minority Whip Newt Gingrich and his closest friend in Congress, Rep. Vin Weber of Minnesota. Weber has been arguing that because the Democrats already have a head of steam developed behind a cut in the Social Security payroll tax, the GOP should hop aboard, get it really rolling, and then have the White House ask for the capgains cut as the price of its support. Gingrich and his Senate ally, Senator Phil Gramm of Texas, argued against this stratagem on the grounds the Democrats would jack up the price on Social Security and eventually make it impossible for the White House to agree. Senate Majority Leader George Mitchell, for example, has clearly indicated he would push for an end to the wage cap on Social Security, which would blow up the works.

The Gingrich-Gramm plan, which now seems to be gelling, would separate the two issues. The President would ask for a growth package that would include a capital gains cut and enterprise zones, but insist that Social Security be kept separate as the FICA tax should not be considered an economic lever. In that regard, I've suggested that the President, when asked, should point out that the problem in the economy is the shortage of capital, not the expense of labor. The idea would be to develop arguments for capital gains and enterprise zones as "plant opening" legislation, build a head of steam through the use of a popular President's rhetoric behind the idea, and hold out the promise of a FICA cut at the end of the line. At the moment, the President's address to the nation tonight on the Gulf War will not contain a mention of capital gains. Gingrich and Gramm are of the opinion a more appropriate timing for the strategy to unfold would require another two or three weeks of preparation. It would be nice if it were mentioned even briefly, and there is still a chance it might, in connection with the Greenspan Commission, the formation of which the President announced in his State of the Union speech in January.

The White House is going ahead with its plan to form a Greenspan Commission, despite the objections of House Ways & Means Chairman Dan Rostenkowski. Late Monday, after the markets closed, Treasury released a letter from Secretary Brady to Rosty, chiding him for suggesting Greenspan "might not be an appropriate choice to lead an analysis by experts on the revenue, and other technical aspects of capital gains taxation." Brady wrote, "I am sure you agree that the technical issues of capital gains can and must be separated from the partisan differences that have clouded this issue," and that Greenspan's record on the Social Security Commission "demonstrates clearly that he can deal impartially with the technical questions underlying a partisan and controversial issue." On Capitol Hill Tuesday, OMB Director Richard Darman indicated Greenspan and Brady are drawing up lists of potential members of the study commission. The President's chief economic advisor, Michael Boskin, is also showing more aggressiveness on the issue. Why not? If President Bush can't deliver on capgains with a 91% popularity rating, he'll never do it. This is it!

DATE:  MARCH 5, 1991 (FAXED ll:23am)

With the help of many well-meaning Republicans, the Democrats have seized the initiative on tax policy. They have advanced the idea of using a FICA payroll tax cut as an economic stimulus instead of a cut in the capital gains tax. Some Republicans, such as Vin Weber, advise going along with the Democrats on the payroll tax and when a head of steam is underway, pulling the Democrats aboard the capital gains train as the price of a tradeoff. Others, like Phil Gramm, believe the Democrats will jack up the price of capital gains to unacceptable levels, as Senator Mitchell has already indicated. The problem for the President and GOP congressional leadership is finding a coherent strategy that will be acceptable to all Republicans and succeed in gaining capgains at an acceptable price.

The President's successful strategy in dealing with the Iraqi invasion of Kuwait is appropriate in dealing with the Democratic invasion of Republican tax territory.

1. The President should treat capgains as if it were Kuwait, a mandate he received that has been stolen from him by Democratic class warfare. The President should indicate he expects it to be surrendered to him by the Democrats without conditions, on the grounds that the payroll tax is a separate issue similar to the West Bank and the Palestinian issue.

2. As he has not done since the '88 campaign, the President should begin speaking out for economic growth, capital formation, and international competitiveness to make clear that this is the issue, and that the capital gains cut is the instrument to achieve these ends. For the first time ever, the President should announce that he, like Alan Greenspan, is in favor of entirely eliminating the capital gains tax. This rhetorical bombing campaign should be selective, aiming only at those Democratic combatants who have used the threat of the fairness issue (biological warfare) to mask their theft. Stating his opposition to a tax on capital formation allows the President to confront the fairness issue boldly and directly.

3. The President should not mention payroll taxes in conjunction with capital gains, but when asked he should point out that the problem in the economy is the shortage of capital, not the expense of labor. Cutting the FICA tax should be considered separately, not as a spur to the economy, but within the context of FICA solvency. The President can signal to the Democratic non-combatants (civilian bluecollar workers) that, upon delivery of capgains, he will encourage those Republicans who are opposed to opening up FICA to do so. He must keep control of the shaping of both capgains and the FICA cut.

4. The President should speak at every opportunity along these lines, calmly and quietly, without bluster. He should indicate that the Democratic opponents of supply-side tax cuts have miscalculated time and again on their political popularity indicating he is not frightened in the least by their threat of dropping the fairness bomb in the elections next year.

The Republican leadership in the White House, in the Congress, and in private organizations should not treat the capital gains issue as one of many on an issues menu of interest to conservatives. The Democratic Party has seen it as a "defining issue" of their party, and so it is, the Democratic Party having the legitimate role in our political economy as the party of income redistribution. For this same reason, the issue of a capital formation tax is a defining issue for the GOP, as the party of income growth. For the last two years, the GOP has backed away from this central debate, shying from its central responsibility as a party, conceding that "fairness" should supersede "growth." Just as the American people knew the Iraqi invasion of Kuwait, as the first naked aggression of the post Cold War world, was something worth fighting over, they will respond to a call by President Bush for this central issue at home. It is the one domestic battle the President must take on. There is no choice if the Republican Party is to preserve its status -- recaptured by Ronald Reagan --as the party of economic growth and entrepreneurial capitalism.