It is too bad the Republican leadership cannot figure out how to get off the defensive on tax policy with the President, but as ye sow, so shall ye reap. In pinning their election hopes last year on Monica Lewinsky instead of economic growth, they now have to scratch for every crumb out of several trillion dollars in projected budget surpluses. It was painful and pathetic watching the GOP House and Senate leaders stand around a combination safe, into which they deposited the make-believe receipts of the Social Security trust funds. Having announced that he will not permit tax cuts until Social Security is saved, President Clinton has spooked the GOP into these silly photo ops, fearful that they will lose control of Congress if they are not more “fiscally responsible” than he. It was Ronald Reagan who first understood that fiscal responsibility were two words the electorate equated with higher taxes and spending cuts on programs for widows and orphans. The GOP also has locked itself into a lock box. With the projected surplus off limits, it now will take Rep. Harry Houdini to cut tax rates this year.
Republican intellectuals are blaming Senate Majority Leader Trent Lott for having wimped out, and Lott certainly deserves a share of the blame for last year’s election strategy. It was the intellectuals, though, chiefly those who inhabit the cultural right, who insisted on that strategy. The Wall Street Journal editorial page deserves much of the blame, as does the Weekly Standard which practically designed the election strategy. It is interesting that of all the culprits, only Paul Weyrich has stepped forward to confess that the cultural line of attack does not seem to work, and the cultural conservatives should step back and reconsider their options. This will lead them back to supply-side Reaganomics, but we will not see this develop until the presidential elections next year. Former Vice President Dan Quayle, who has argued the GOP should be on the offense on economics and on the defense on cultural issues, has already committed himself to offering the Treasury spot in a Quayle cabinet to Jack Kemp -- with no quid pro quo from Kemp. In fact, Quayle says that whoever wins in 2000 should ask Kemp to take the Treasury portfolio. By defense on cultural issues, Quayle means the party should be defending bedrock social values, but not shoving them down the throats of those Americans who resist having the government lecture them on morality. This was Steve Forbes’s position in 1996, which caused him grief with the Christian Coalition, but he may have been four years early, as the Weyrich statement suggests.
What can we expect on tax policy given the GOP lockbox? At our conference in Florida two weeks ago, I had lunch with Senate Budget Chairman Pete Domenici, who traditionally has been suspicious of supply-siders. He is definitely more open to our views now that the budget is in the black. I conceded to him that in 1999 there was not much political wiggle room. I suggested the two best shots to keep the economy expanding at a healthy rate for the next two years: 1)The broadening of the Roth IRA, to $5000 from $2000 per family, which would have powerful supply-side effects in forming new capital -- with small static budget consequences; 2)The bipartisan Coverdell-Torricelli bill, which broadens Roth IRA to $3000, but also gives credible exemptions of $5000 per year on capital gains and $500 on dividends and interest to a family, and also widens the gap between the 15% and 28% thresholds by $10,000 of taxable income. It will be hard for President Clinton and the Democrats to resist such obvious tax breaks for the middle class, which have relatively small static budget costs, and are of no interest to Bill Gates or the other Americans of wealth. If the GOP leaders can sell this to enough Democrats, especially those on House Ways&Means, this will be enough to sustain the financial markets and the real economy -- everything else being equal. It still will take Houdini to get past the rules.