Growth Package, Downside
Jude Wanniski
October 18, 1991


As the news accounts of yesterday's White House meeting on the domestic economy indicate, there is plenty of enthusiasm for pushing a growth package that has a capital gains tax cut at the top of the list. President Bush was more animated and aggressive in making the arguments than he has been since he made them in his 1988 presidential campaign. Senator Bob Packwood, ranking Republican on Senate Finance, who opposed a capgains cut early in 1989 and has warmed up to it since, now says it is an essential ingredient of any growth package. Even Treasury Secretary Nick Brady is quoted in this morning's Wall Street Journal as if he may soon be ready to climb into the ring. He will fight for a capital gains cut, he says, as soon as he is assured he will win! Don't tell me Mr. Brady does not understand the dynamics of entrepreneurial capitalism! Of the President's demand for a capital gains tax cut to get the economy off the ground, Brady had this to say: "I think election years are lousy times to have tax bills. I think it's all political posturing."

This remains the downside. This morning I faxed a note to Budget Director Richard Darman, advising him of the tremendous enthusiasm among our clients to our report yesterday of the potential breakthrough on capgains. A staff memo I got this morning reported on dozens of client calls, finding: "Overall, incredible excitement and hope, tinged with a wariness of the Bush Administration's willingness to really follow this through. They are wondering how Brady can be either neutralized, co-opted or something." Realistically, the only force capable of pulling Brady into the ring and pushing a fight to a conclusion, is Darman. The President himself is as powerless and immobile as a King on the chessboard, only able to move a step at a time. If Brady is going to remain in the corner, only Darman has the power and mobility to get the job done. And Darman is still clinging to his Budget Agreement. When all is said and done, the White House meeting yesterday did not do anything to change the array of forces on the chessboard. House Ways & Means Chairman Dan Rostenkowski insists there will be no tax bill this year. The only way to get one out of him is to neutralize the liberals in the House Democratic caucus.

In the summer of 1990,1 urged Darman to finesse the liberals by "breaking the bubble," permitting the top rate on personal income taxation to rise to 31% from 28%, which the Democrats demanded as the price for cutting capital gains. It was a small enough price to pay, I argued. The argument I got back from the President's economic team was that allowing the rate to go up to 31%, would break the terms of the 1986 tax deal with Congress, opening the way for ever higher tax rates in the future. We would retrace the steps of the Reagan years. Of course, what we got was a Budget Agreement with no capgains cut, and the Administration gave the liberal Democrats the "bubble" anyway. The President's team persuaded itself budget deal was more important than all else the President's campaign promise, a capgains cut, and the bubble.

Now, my recommendation to the Administration and Republicans in Congress is to give the liberal Democrats what they are now demanding for a capgains cut: An increase in the personal income tax rate for rich people. The President, I argue, should have as the centerpiece of his growth package an increase in the top rate to 33% from 31%, with the threshold at $1 million. He should announce it as his concession to the Democrats, and explain to the American people that it is necessary to give them this concession in order to get them to breathe life into the economy with the capital gains tax cut which he, George Bush, promised the American people in 1988. The President could go on to tell the country that while he needs to do this now to bring relief to the disappointingly sluggish economy, he will recommend that the Republican Party platform in 1992 include a promise to phase out capital gains taxation altogether, and to eliminate the higher tax rate. The country would go bonkers! People would dance in the streets! We'd have at least 5% real growth as far as the eye could see.

Unless something of this sort becomes Darman's gambit, I can't see how a breakthrough will occur on the President's initiative. If it occurs on the initiative of the congressional Democrats, we will be talking much higher rates of income taxation at much lower thresholds, and a narrow, targeted, capgains tax reduction. As of yesterday, Darman was still resisting any alterations to the Budget Agreement. As he always plays his cards close to the vest, I'm not sure he has his heels dug in for good. He has agreed, I'm told, to appear on the Evans & Novak weekend talk show, which appears on CNN practically everywhere in the world. I watched it in Tokyo last April. It will not be as thrilling a show as last weekend's soap opera sponsored by the Senate Judiciary Committee, but it may be of equivalent importance.