Trip to Washington
Jude Wanniski
May 7, 1999


Three days in Washington left me modestly encouraged that there might be a supply-side tax cut this year after all is said and done. The big reason for cheer is that the bipartisan "Family Savings Act" co-sponsored by Sen. Paul Coverdell [R-GA] and Sen. Bob Torricelli [R-NJ] is being viewed by Senate Majority Leader Trent Lott and Senate Finance Chairman Bill Roth as the best platform from which to launch tax legislation that actually could be signed into law. This positive development is coupled with the almost certain legislative match-up in the House with co-sponsors Rep. Lindsey Graham [R-SC] and Rep. Bill Jefferson, a black Democrat who represents New Orleans. By getting Jefferson to join him, Graham gets the only black elected official I've ever met who I can imagine being elected President. A protégé of Rep. Charlie Rangel [D-NY], the 52-year-old Jefferson has a Harvard law degree and a Master's in tax law he picked up after Rangel got him a seat on the Ways&Means Committee following his election in 1990. In 1992, he was re-elected with 87% of the vote! This year, he would like to be chosen as the Democratic nominee for Louisiana governor in this November's election. If he is, I assume he will be elected governor.

The budget constraints are the biggest part of the problem, even in moving something with broad bipartisan support. There may be enough wiggle room in the budget to cover the projected "cost" of Coverdell-Torricelli as it has been scored by the Joint Tax Committee -- about $140 billion over five years. But there are so many other vested interests that want to make use of that "wiggle room" in the budget that the congressional leaders practically have to know in advance that when the budget reconciliation occurs at the end of this year, it will be this bipartisan tax cut that survives, not the competing partisan claims. It will be a delicate process to keep it balanced, and there are already the beginnings of discussions on how to broaden its bipartisanship by adding an increase in the minimum wage on the left and a 15% capital gains tax on the right. Cutting capgains to 15% from 20% would in itself bring a storm of opposition from Democrats as a giveaway to the rich, but it may be necessary in order to make the package pay for itself. Joint Tax won't tell us how it would score a 15% capgains rate, only that it would be positive in producing revenue. The fact that it would be positive and produce more revenue is not enough for Democratic liberals who still insist it is better to have a weaker economy to prevent the rich from becoming richer. That's where the minimum wage comes in.

In 1996, after Bob Dole quit the Senate to run for President and Trent Lott became Majority Leader, I advised Lott that he safely could allow the increase in the minimum wage the Democrats then were demanding in exchange for their cooperation on the budget. This was because almost everywhere in the country the labor market was clearing above the higher minimum level. When McDonald's has to pay $5.50 an hour and the new minimum is $5.25, there are businesses that may not be able to operate at the higher minimum, but the labor they would have hired would work for McDonald's instead. In a discussion with Rangel and Jefferson this week, I explained that things had changed since 1996, which mooted the argument being made by the Democrats that the higher minimum did no damage, so why not move it up by another dollar, to $6.25 over two years. The biggest change has been the decline in the gold price, to $285 from $385. The real value of the higher minimum has increased by 25% as a result of the monetary deflation. This is a big reason why black teenage unemployment has declined and why national crime rates also have dropped. With the higher levels of capital formation made possible by cutting the capital gains tax to 20% from 28% -- with an added push from the capital friendly Roth IRA -- labor has become scarce even with this big increase in real wages at the bottom of the economy.

What happens if there is a recession next year, perhaps as a result of the Y2K problem? That's when the minimum wage of $5.25 would really bite, pushing up black and white teenage unemployment. At a $285 gold price and $6.25 minimum wage, I told Rangel I could imagine black teenage unemployment going back up to 50%, as small businesses were wiped out and big businesses were trimming back on labor costs as well. Indeed, the big push in Congress for a higher minimum always comes from Big Business and Big Labor. Corporate America has to pay higher wages anyway, especially in a labor market that Fed Chairman Alan Greenspan Thursday said in Chicago may be so tight as to become inflationary. Acting in what it perceives as its self interest, Corporate America also resists a lower capital gains tax, because most of its benefits go to smaller competitors and entrepreneurs who need equity capital more than do the established firms that can issue debt. My argument, then, is that the higher minimum be twinned with the 15% rate, which thus keeps Coverdell-Torricelli-Graham-Jefferson legislation in equilibrium.

As the ranking Democrat on Ways&Means, Rangel would be able to move the Democrats on the committee behind the bill as Torricelli would in the Senate Democratic Caucus and in the Oval Office. Tax legislation would be absolutely impossible this year if there were not such a bipartisan team making sure the legislation remained in political balance every step of the way. The fact that Torricelli is chairman of the Senate Democratic Campaign Committee and that he was devil's advocate, one might say, in the impeachment of President Clinton, gives him the muscle it would take to work his side of the issue.

It is not a small thing to accomplish. The legislation as it stands now would exempt the first $5,000 of capital gains per family per year, exempt the first $500 of dividends and interest, expand the Roth IRA to $3000 from $2000 annually, and widen the income-tax brackets between 15% and 28% by $10,000. The supply-side effect would be to lift the value of financial assets generally, but the smaller-cap Russell 2000 in particular. In discussing the Social Security problem with Rep. Jefferson, he agreed instantly that the goal had to be an increase in the capital/labor ratio over 20 years, so two workers could support one retiree. He also sees, without any of the kinds of explanations necessary with other members of Congress, that Coverdell-Torricelli would be an important incremental step in that direction. If it fails this year, there certainly will be no tax bill next year. We will be lucky if the Internal Revenue computers are still working as they pass into Y2K. In his speech at the Chicago Fed Thursday, Greenspan offered soothing words about Y2K, but we still are worried about a global economic slowdown of at least modest proportions. It would not hurt at all to have one more supply-side tax cut before the millennium ends. During my visit, I was happy to find this tiny island of bipartisanship in an otherwise stormy partisan sea.