Is President Bush Serious?
Jude Wanniski
October 25, 1991

In his press conference this morning, President Bush once again plugged his capital gains tax cut as the key ingredient in his plans for economic growth. He asked the Congress to try it, and if it didn't work he'd take all the blame, and if it did, he'd only take half the credit. Alas, he also said he would do nothing to break the Budget Agreement, a signal to Democrats that he is not serious. Instead of reading the President's lips, they are reading Treasury Secretary Nick Brady's, who is saying a tax bill is a lousy idea and mere "political posturing." I talked last night to a Democrat who is close to the action, and he offered to cover the bets of anyone who thinks there will be a tax bill this year. The Democrats do not want one. Period. And the only way it can happen is if the President gets serious. The President cannot get serious as long as he continues to put the Budget Agreement ahead of the economy.

Theoretically, of course, the President can get the capital gains tax cut without busting the Budget Agreement. Senator Phil Gramm of Texas and House Minority Leader Newt Gingrich have teamed up on a package that meets all the administration's budget requirements. The Republicans in the House and Senate who have fought each other for the last year trying to agree on a package are now at the point of accepting the Gramm-Gingrich proposal, more or less. But it's not going to happen as long as House Ways & Means Chairman Dan Rostenkowski refuses to go along with it. The President can get nasty and jump up and down demanding the Congress send him a growth-oriented tax package. He can insist on keeping them in session until Christmas until they deliver. But they don't have to send him legislation he will want to sign. They can load up a Christmas tree of goodies that breaks the Budget Agreement, including some version of Bentsen's $300 kiddiegrant, a puny capgains cut and a 38% tax on rich people, i.e., the median income of registered Republicans. We go around in circles once again. "All that's going on right now is a replay of last year's debate over the Budget Agreement," one of Gingrich's aides advised me this morning.

Still, there is a sense I pick up at the White House that something is happening. A few reporters I checked with, who have been skeptical, now tell me they will not bet against a tax bill. This is mainly because the President is more serious than the rest of his team and is becoming more alarmed at the prospect of going into 1992 with an economy still weakening. They tell me they think Darman will soon be sitting down to negotiate with Rostenkowski and Lloyd Bentsen. But I still don't think anything good will come of such talks. Darman has been talking to the Democrats for three years and has not gotten anywhere with this inside game. Only if Darman switches to an "outside" strategy can he get policy in motion. As long as he thinks the economy will grow okay without capital gains as Michael Boskin does --we will go into 1992 without a tax bill. In a memo to Darman this morning I warned that "You will have a truly frightening time as budget director next spring unless you get a tax bill through before Christmas." I went on as follows:

The most critical point is that a DJIA of only 2900 is not discounting a profit stream off the nation's capital stock sufficient to lower the unemployment rate in 1992. To get the Dow up to 3400 or 3500 will be enough to do so, we reckon, and a 19.6% rate would do that. A 15% rate, unindexed, but covering all past investments in real and financial assets, would send the Dow to 4100 in short order, discounting a non-inflationary growth rate in the range of 5%. Arguments I hear around the White House that a tax bill will be inflationary fail to understand that only Fed-led expansions are inflationary in the first instance.

A 15% capgains tax, which the President promised the people in 1988, would sharply reduce inflationary expectations, i.e., the Fed would no longer be pressured by Brady, Boskin, and you into an inflationary policy. Remember: The 1971 breakdown of Bretton Woods occurred as the result of Nixon's doubling of the capital gains tax in 1969. Arthur Burns flooded the banks with liquidity trying to get the economy going.

If you don't get a capgains cut by year's end, it will be seen throughout the country as a failure by the Bush Administration. The Democratic contenders don't have to run against the President. They can run against his team. There are very few people who agree with me at this moment, but I believe the President will lose in 1992 unless you become fanatical on a tax bill this year. (A Mario Cuomo/Jerry Brown liberal supply-side ticket would do it.)

You're the only person in the administration who can save the economy and the President in 1992, I believe. And I don't think you can do it unless you alter your strategy, which remains the same "inside" approach you have followed without success from the first days of the administration. Instead of sitting down with Rosty and Lloyd, you have to think of the President working an "outside" strategy of your design. Develop the growth package without consulting the Democrats at all. Then have the President announce it on prime time, with the news that he will ask the Congress to stay in session until it sends him legislation he can sign. I liked the idea he threw out in his press conference this morning that Congress should try it and if it doesn't work he'll take all the blame, and if it does, he'll only take half the credit.

It is with this kind of approach in mind that I recommended to you that the President include in his address to the nation the concession to the Democrats of a 33% income tax on millionaires. Instead of allowing the Democrats to deal the cards, he must do it. If he makes the concession in the right way, following it with a call for the 15% capgains tax that he promised the people in 1988 -- using the correct, supply-side arguments he will have successfully limited the negotiating room left for the Democrats. They will not be able to demand higher tax rates on millionaires, as you suggest, for they would be seen by the American people as having upped the ante after the cards had been dealt. Thereafter, every announcement of economic weakness or increased federal, state or local deficit will leave the President in the position of being able to bang the Democrats around at will. Knowing that, the Democrats will be in a position to compromise with you when you show up at the Rosty & Lloyd Show.

Included in the President's speech to the nation should also be a section indicating he is only making this tax concession to the Democrats because they have held this gun to his head. He should state that in 1992, he will recommend that the Republicans in Convention adopt a platform that phases out capital gains taxation altogether and brings the top rate on income to 25%. If the President would give a speech like this, covering both the economy's immediate needs as well as its long-term requirements, he would leave no running room on tax policy for the Democrats.

If the President is serious enough himself, he can of course threaten personnel changes unless his economic team gets behind a workable strategy. At the moment, for all the pretty talk from the Oval Office about a growth package before Congress adjourns, I am taking seriously the odds against it.