Tax Maneuvers
Jude Wanniski
February 13, 1992


As we try to follow the action in Congress over the President's growth package, it is well to bear in mind that the House Democratic leadership has no intention of acting responsibly in this election year. Majority Leader Richard Gephardt is calling the shots on tax legislation, and his interest lies in boxing in the White House and congressional Republicans. Because Gephardt can control the rules, he can smother practically all responsible impulses among his flock. Ways & Means Chairman Dan Rostenkowski does not like Gephardt, but he's going along with the Democratic leaders on the game plan. They've made a pact that no spending cuts anywhere can be applied to tax cuts, so if there is going to be a cut in the capital gains tax, along with their middle-class tax cuts, it will have to come via an increase in income-tax rates on the rich, which they count as anyone who makes more than $80K. The Democrats will permit up-or-down votes on the President's package, which even many Republicans will vote against, because it contains so many flaws. A vote will then be permitted on a slimmed-down version proposed by the growth Republicans, and this will be defeated by a partisan vote. The Democrats will then put forward their plan, which will contain a watered-down capital gains tax cut, of the kind that passed the House in 1989, along with tax hikes on the rich. This will pass, but with not enough votes to override a veto. The Senate will then take up the bill. Unlike 1989, when Majority Leader George Mitchell blocked a capgains cut through procedural maneuvers, this time there is too much visibility for that kind of strategy. In other words, Mitchell may not be able to contain an outbreak of responsibility. The Senate may actually pass something that approximates the President's position on capital gains, permitting spending cuts to offset tax cuts on families and payrolls. If so, the House-Senate Conference will determine just what the Democrats think they can get away with and still avoid a veto. All this will happen before the President's March 20 deadline.

Chances are the President will be sent a bill he will be forced to veto, because his party's conservative wing will insist he not permit a higher bracket for the "rich." A higher bracket, though, will be the key to getting legislation through Congress. Vice President Quayle and HUD Secretary Kemp have been signaling a willingness to accept a higher bracket for millionaires -- drawing the line at seven-figure incomes, however. President Bush helped propel the stock market upward yesterday, we think, by refusing to say he would veto a millionaire's tax. The GOP right would swallow a higher bracket as a fait accompli if the rest of the package met the palatability test. It could well be, though, that the first round that ends March 20 will be inconclusive, with the Democrats sending up a bill the President vetoes and has sustained. A second round would then take shape in April, as Washington will be under great political pressure to do something. This scenario will be colored by parallel developments in Presidential politics. If Paul Tsongas wins New Hampshire, sending Bill Clinton into a nosedive, it complicates the legislative scene, as horrified Democratic leaders, believing Tsongas to be unelectable, will press Gephardt to enter the race. It's more likely he would do so than Mario Cuomo, Democrats believe, as he actually has a campaign apparatus stitched together from when he ran in '88. If no other Democrat enters the field, I would not be surprised if Tsongas became the nominee, as he is clearly the class of the field. The more successful Tsongas is, the more likely we'll see decent legislation out of the Congress this year. The likeliest scenario now, I think, is for a modest growth package to be signed by the President, but sometime later in the spring, after a first-round veto. Bear in mind that all crystal balls are extremely cloudy at the moment.