The Budget Deal Again Jude Wanniski July 28, 1997

As unlikely as it seems, there is a fair chance Congress will pass budget legislation this week and have it on the President’s desk by the weekend, before the August recess. Even though it will supposedly have in it a cut to 20% in the capital gains tax, I almost wish it would be voted down in the House or stalled in the Senate, to permit further negotiation during the recess. In order to get the 20% rate, House Speaker Newt Gingrich caved in on everything the liberals demanded, and then some. As the bill is now being drafted, the provisions of the welfare bill the President signed last year in order to get re-elected have now been watered down to satisfy the “poverty industry” -- which has been horrified at the success states like Wisconsin and Missouri have had in cutting welfare rolls. GOP staffers who are disgusted with what their leaders have done are now calling the “Welfare to Work” provisions the “Work to Welfare” provisions. 

We are also now going to have the kind of European “child allowance” that the left-wing ladies at the “Children’s Defense Fund” have been trying to get for decades. What began as a Republican effort in the Reagan years to offset the negative effects of inflated marginal income tax rates on the working poor -- the Earned Income Tax Credit -- is being turned into the first stage of a Guaranteed Annual Income. The Reagan effort was explicitly designed to remove an incentive to stay on welfare, because the next dollar of wages would cause a loss of thousands of dollars of benefits. Now the GOP has agreed to send free federal cash to anyone who has a child, whether or not they pay any tax. This puts back the disincentive to work, with recipients losing the cash when they have higher work income. Where Republican Gov. Tommy Thompson of Wisconsin has blazed the trail that denies cash to welfare parents on drugs or booze, supplying only benefits, our federal government will now be in the business of sending out checks to the deadbeats who have by now figured out how to run the tax-credit fraud rate up to 26%. 

Part of the problem is that the most powerful congressional Democrat in the tax-writing House Ways&Means Committee, Rep. Charlie Rangel, is in a position to insist upon cash handouts to his constituents in Harlem. He can’t do it just for Harlem, so all 435 congressional districts will get the handouts. It makes no impression on Rangel that cash to the low-income classes is bad for their work ethic when he sees so much cash in corporate welfare going to the high-income classes. It is disappointing to see Rangel denouncing a cut in the capital gains tax as a giveaway to the rich, after all the years I’ve spent trying to get him to understand that the greatest benefits to a lower capgains rate go to those without capital, with his constituents at the top of that list. 

Rangel would not have been able to push the issue this far if it had not been for Gingrich, who promised the Christian Coalition and the Family Research Council that $500 kiddie credit, designed to offset $500 in federal tax liabilities for each kid. When that credit is superimposed on the Reagan earned-income tax credit, millions of families wind up getting a refund, which constitutes a negative income tax. At first, Republicans fought the idea of having the credit applied against payroll taxes, but gave up on that. Now they have caved in on the refund. Rangel is brazen enough to say it is offsetting state and local taxes that people shouldn’t pay. Support for this idea still is coming from the “conservative” Heritage Foundation, which designed the kiddie credit for Gingrich in the first place. The boys at Heritage thought it would neutralize the “class warfare” arguments of the Democrats, but instead it has grown into the monster we see before us.

The Democrats of course continue to insist that the legislation is exactly the opposite of what it is, helping Gingrich every step of the way by moaning and groaning about how he has outfoxed them. It is part of the deal. Indexing of capital gains was supposed to be the only concession by the Republicans, but now there will be no change in the corporate rate on capital gains, a smaller exemption on the estate tax, plus the new “Work to Welfare” revisions that President Clinton promised the liberals last year. What is driving Gingrich into these two-handed concessions is the fear of a government shutdown at the end of the fiscal year. The Washington Times this morning reports on a poll showing that if the government is shut down this year, 85% of Americans will automatically blame the Republicans. That’s why Gingrich desperately wants a tax bill the President will sign, and why the President is giving every indication he will sign one this weekend if it is everything he wants. The Democratic leadership is following the orchestrated line that it would be better if the legislation were discussed carefully, even though it may take until October to get it done, which of course petrifies Newt. 

What if the legislation were delayed until after the recess? Yes, it would put at risk the cut in the capital gains tax. It would, though, enable Congress to resist the most dangerous refunding provisions of the kiddie credits. I use the word dangerous because those who are dedicated to fundamental tax reform can’t see a politically viable way of eliminating the negative income tax once it is entrenched. The way it is being written eliminates tax liabilities on income-tax and payroll tax for families with children under $30,000, a nice goal, but with skewed incentives. A delay would also enable Congress to get its hands on the flood of revenues coming into Treasury. Last Friday, after the Democrats sent a letter to the GOP leadership warning that the legislation might be pushed into September, to panic Newt, Sen. Bill Roth, chairman of Senate Finance, was smart enough to fire back a letter to the White House demanding release of the new revenue projections -- to enable him to double-up all the tax cuts now instead of at some future date. The Democrats have had the estimates since July 15 but are hiding them. If the budget deal blows up this week, the Congressional Budget Office mid-August report on revenues will be available. Congress would be able to put back the estate tax exemption to $1.2 million over five years instead of $1 million over seven. Senator Roth would be able to sweeten his IRA accounts, which the lower estimates forced him to roll back. Capgains could be extended to corporations, and the tax rate on commercial real estate could go to 20% from 25%. 

What the hell? All growth is the result of risk taking. I’d roll the dice. Which is to say, if the budget deal does break down this week over details that really make it unacceptable to Senator Roth and Chairman Bill Archer of Ways&Means, it would not make me terribly unhappy. In fact, I know of several Reaganauts in Washington who have been counting on President Clinton getting even greedier at the last minute, which would surely cause a breakdown. They are disappointed today, because he seems to be playing it smarter than that. The Democrats have so cleverly taken Newt’s measure that lately the President seems almost sorry for him. We’ll know, later in the week, in the last gasp of negotiations over the tax bill, just how sorry he feels.