A Three-Legged GOP
Jude Wanniski
July 14, 1997


The stock market continues its healthy advance, with NASDAQ and Russell 2000 now catching up with the blue chips as Wall Street factors in the likelihood of a capital gains tax cut. The President’s 64% popularity rating and the dismal beginning of the Senate hearings on campaign finance -- which were supposed to embarrass the President but have not -- makes it more likely the Senate-House conference committee will this week or next produce a tax bill the President will sign. In his Saturday radio address, the President harped against the idea of indexing capital gains. The argument that it will cause an explosion of deficits a decade from now is nonsense, but if it is excluded from the bill sent him, which seems highly likely, it gives him the excuse he needs to sign it promptly -- without putting the country through a veto fight. The other reason a pro forma veto seems much less likely than it did a month ago is that revenues are cascading into the U.S. Treasury. It now appears likely the federal budget will be in balance in 1998, not at the target year of 2002. The revenue flood, which would reach tidal proportions with a capgains cut, is an embarrassment of riches to both parties, for different reasons. The Democrats are nervous because Republicans, in control of Congress, are in a better position to dispose of revenues in excess of balance -- either by cutting taxes further, paying down the national debt, or increasing spending for their favored constituents. Republicans are being pulled in these three separate directions: tax-cutting, debt cutting and spending. 

Tax cutters argue, as also do we, that until tax rates are where they should be to produce optimum growth and revenue, there should be no funds made available to pay down government debt. It is sufficient to concentrate on monetary policy driving down long-term interest rates, which enables the federal government to refinance the $5.4 trillion debt at low rates, thereby saving at least $100 billion annually in debt service costs. Debt cutters, led by Rep. Mark Neumann, a young Wisconsin Republican who has House Speaker Newt Gingrich in his corner, want the GOP to commit itself now to dividing all fresh revenues into two separate streams -- one third to cut tax rates, the other two-thirds to pay down debt. The practical effect would be to keep tax rates high in order to produce revenue required to pay down debt, but Neumann & Co. are really more interested in keeping the spenders from getting their hands on any part of the tax revenues. The third GOP faction, the spenders, are those who want to compete with the Democrats in handing out federal pork. Gingrich presents himself as a friend to all three factions, which sounds fine, except there are practical effects.

The most immediate involve the coming mid-year revenue estimates of the Congressional Budget Office. Remember the last time CBO ran the numbers, in April, it discovered $225 billion in revenues over the next five years being generated by the spunkier economy. That number enabled the President and Congress to grease the budget deal, with every dime of the $225 billion going to increased spending. The numbers are being run again, and it is beginning to smell like another $100 billion is going to be thrown into the pot. If the funds were in hand, they could be used to make deeper cuts on estate taxes, capital gains, or the income tax. But the tax bill will be signed before CBO reports in mid-August. The GOP tax-cutters fear that as soon as those numbers show up, Gingrich will deal them out to his appropriation chairmen, throwing a chunk to the Democrats as well, and the $100 billion will go the way of the $225 billion. The only way to interrupt the process would be through a vehicle that would prevent all fresh revenues from being automatically spent. This means a revision of the budget process, which is being attempted by Sen. Spencer Abraham [R-MI]. Abraham proposes a “lock box” plan, which would make all fresh revenues available first for tax cuts. Only if Congress failed to pass tax cuts would the revenue go to deficit reduction. Abraham wants his plan adopted in the conference report of this tax bill, to prevent the $100 billion he smells on the CBO horizon from going into new spending. The debt cutters will oppose the plan. The spenders, who naturally enjoy the support of the Democrats, will always wind up winning these kinds of skirmishes. Gingrich keeps his coalition together by talking about tax cuts, but giving his practical support to the other two GOP factions. There are three legs to the Republican stool , he will say.

The tax cutters of the GOP should make common cause with the spending wing, which enables it to attract Democrats on both counts. Government should never contemplate reduction of the national debt as long as there are better uses to make of revenues -- for tax cuts or for public works. These decisions can’t be made now. IBM shareholders don’t want management to commit to buy back shares until there are none left, unless IBM can’t invest the funds with any prospect of a positive return. We can be sure American taxpayers don’t want bonds paid down as long as the funds can be used to foster more rapid economic growth. As I tried to explain in a memo to Gingrich on June 24:

The legislation Mark Neumann proposes would never be appropriate, because it ties the hands of Congress in making investment decisions. This is why Gramm-Rudman-Hollings was a terrible idea and why it has worked so poorly. It is also why a Balanced Budget Amendment is a terrible idea. As revenues appear on the horizon, there must always be a serious debate in Congress between the two political parties on how they should be invested. It may be that in the year 2007, with a streamlined flat tax system in place and thus no need to dedicate new tax revenues to lower tax rates, that Congress would decide to spend at the 2006 baseline, and use the revenues to redeem debt. It is a decision that should be made then, not now. It would of course be appropriate for this Congress to put into this year’s legislation a commitment to invest fresh revenues in tax cuts next year -- because you are expected to make decisions of this kind in a two-year framework. You could negotiate this with the President and congressional Democrats, to accelerate the timetable for their college credits next year if they would agree to the commitment of tax cuts being financed with future growth revenues.

Such arguments mean nothing to Gingrich, who simply believes the core of the Republican Party is with Neumann and debt reduction. Some of this springs from his belief that the GOP won control of Congress in 1994 because of the various pledges to balance the budget in the Contract With America. I never believed Gingrich’s “Contract” deserved credit for 1994; the national electorate merely repudiated the direction in which the President had interpreted as his mandate in the previous two years and saw the Republicans as an improvement if only by dividing government. There is no mass “core constituency” in the country for paying off debt when there are so many greater problems that must be addressed by the national government. Gingrich seems so sure of himself that he has already announced that the Republican party platform in 2000 will contain something like the Neumann bill -- and that if Jack Kemp thinks he will be the GOP nominee, he had better get used to swallowing that plank. Now, we hear from Fred Barnes of The Weekly Standard, Gingrich is seriously thinking of running for President. Why not?