Back to the Budget
Jude Wanniski
February 27, 1996


Key House Republicans are meeting all day today in a strategy session on the budget. On the odd chance they will decide to throw in the towel completely on a capital gains tax cut this year, we have to be prepared for a serious stock market selloff and the recession it would foretell. In his testimony last week, Fed Chairman Alan Greenspan said he still thought chances of avoiding a recession were better than 50-50, based on his sense a budget deal will be done. He should have said the economy is waiting for the capgains cut that would be part of such a deal, to make it exactly clear what it is that will avoid the recession. Alas, that has never been Greenspan’s style. His passion for a zero capgains rate is a personal matter, which is why the capgains rate is still exactly where it was when he was named to his first term in 1987.

What are the chances that the GOP will throw in the towel? We are assuming there are those in the meeting today who will make the argument that if the Republican Congress sends a debt-limit bill to the President with a capgains cut, he will demagogue the issue or the Democratic leadership in Congress will, and the votes will not be there. Of course, the Republicans control the House and could pass anything they wish. The White House says it wants a “straightforward” debt limit bill, without tax cuts, but the President will sign what he gets as long as he doesn’t have to give the Republicans as much as they have demanded on entitlement spending cuts and/or reforms. The sentiment among House Republican rank-and-file remains hardnosed on this issue, demanding spending cuts before tax cuts. This is why there is still rampant speculation there may be no tax cuts at all on the debt limit. We have to remember that it has been the Austerity Wing of the GOP that has been making the spending-cuts-before-tax-cuts argument all the way back to 1987, which is what has blocked capgains. We continue to count on Gingrich to bring capgains home, remembering that it was Newt who defied the Bush-Brady-Sununu Austerity team in the 1990 budget deal that cost Bush his re-election. Newt was on the Dow Jones wire this morning at 10:37 pledging continued support for the tax cut rider to the debt limit. The report paraphrased Gingrich: “The economy is currently in need of stimulus in order to boost overall output and keep the U.S. from sliding into recession, Gingrich said, noting that the Clinton administration’s economic policies continue to weigh on growth.”

When Congress returned yesterday, the first news dribbling out at the staff level indicated that the Republicans were preparing to negotiate with themselves. On Monday morning, we learned in one report that if capgains were passed, it would only be effective on January 1 of this year, not January 1, 1995. We then learned that the GOP was seriously considering a capgains cut only for individuals, not corporations. Corporations are, of course, corporate individuals, which makes the concept dumb to start with. They should be as uninhibited in investing in each other as are human individuals. The tax distortion would impact most adversely mature corporations, which make investments in other enterprises and thus show capital gains. It affects least new high-tech enterprises at the beginning of their lives, which are reinvesting profits in themselves instead of others. The big selloff yesterday was in the DJIA stocks, not the high-tech stocks.

The last thing Gingrich wants is a repeat of last year’s debacle, when he thought the public would blame the President, not the Congress, for shutting down the government. The problem now is to make it clear who will be to blame for the recession, if the capgains tax is not cut. The GOP leaders were so demoralized by their defeat last year that they now seem willing to take anything they can get, as long as they do not rile the President. It is Clinton, we are told, who insists that there be no capgains breaks to corporations, only to individuals. This follows from the dopey reading of Pat Buchanan’s political surge, which the White House politicos identify with his corporate bashing and the AT&T layoff of 40,000 workers. Isn’t there anyone around the President to explain the benefits to high-wage job creation of a cut in the corporate capgains rate? The new enterprise that would result would probably enable AT&T to hire back the 40,000. The level of incompetence at the Rubin Treasury department even has me thinking fondly of Nick Brady. In any event, we continue to believe Gingrich will deliver on capgains, and that it is in the President’s interest that he do so.