Tuesday's Market Sell-off and the Tax Bill
Jude Wanniski
July 21, 1999


Our Monday report on the likelihood that a good tax bill would emerge from bipartisan compromise this month did not take into account the fact that Rep. Mike Castle, the former Republican governor of Delaware, would spend all weekend thinking of ways to send the stock market into a nosedive, with a special push to the NASDAQ. Charactererized as a Republican "moderate," Castle followed the script of Sunday's NYTimes editorial by arguing the skimpy GOP tax cut of $864 billion over ten years was too much for him. He insists he will lead seven other "moderates" in defying the GOP House leadership and voting against the House rule that would guarantee its passage, setting up a compromise with the $792 billion package coming out of the Senate. Castle only will support a $514 billion package over a decade. Our new Treasury Secretary, Larry Summers, a direct descendant of Herbert Hoover, says he will stand firm at $300 billion on the grounds that the economy will do best by paying down the national debt. On this course, the legislation that eventually gets to the President's desk would be closer to $400 billion, with the difference coming out of a lower capital-gains tax and meaningful reduction in the estate tax.

While House Ways&Means chairman Bill Archer was forced to backpedal to $792 billion to pacify Castle, word came to the stock market that Castle still would not budge. It continues to amaze me that our financial press saw no connection between the threat to the tax bill and the steep slide in equity values. On June 22, we pinpointed the 62-point slide in the Dow and even deeper percentage drop in the high-tech sector to the June 21 Bloomberg Report that the bipartisan commission on the Internet had voted to recommend an Internet tax when the issue next is taken up by Congress. Not one news report in print or electronic media mentioned the connection, even though the slide began the minute the news crossed the wire. Today, we can find no reporting anywhere that yesterday's steep slide is connected to the tax bill. Not in the WSJournal or NYTimes, both of which ascribed the slide to profit taking. Not in the Washington Times, which mentioned the trade deficit, or the Washington Post, which simply said weakness in the high-tech sector caused the sell-off.

The market comeback today is reminiscent of the market ups and downs of 1997, before a deal finally was done to get capital gains down to 20%. Glitches happen. House Majority Leader Dick Armey today insists there will be enough horsetrading to get the required votes on the rule to dodge that bullet. Clearly the tax scenario now requires more hard work and likely will extend well into autumn. What the market slide tells us -- even though our press corps does not -- is that the value of the nation's capital stock is dependent upon what is finally in the bill that does get signed into law. It is much harder for Republicans to blame V.P. Al Gore and the Democrats for their failure, though, if they can't even now see the connection between tax rates, the stock market, and the economy's immediate future and make a big deal out of it.