Easter Recess Jude Wanniski April 22, 2003

SNOW PROPOSALS: There was a little confusion in yesterday’s WSJournal story on Treasury Secretary John Snow’s ideas on how to shoehorn everything the President wants on tax cuts into $550 billion. Yes, he said he’s open to a 50% exclusion on the double-tax on dividends, but only if Congress agrees to phase in the other half during the balance of the decade. He also appeared to be saying he would be willing to drop the speed-up of the top marginal income-tax rate this year to 35% from 38.5%. The WSJ reporter did not quite understand Snow was saying the exact opposite, in that his reluctance to do so was because there is so much “oomph” in bringing down the top rate, which most small businessmen face. The only importance of the Snow interview is that it indicates the administration is willing to do just about anything to end the double-taxing of dividends, but that a phase-in is the preferred route to having the costs estimated on a five-year basis. A phase-in would of course be better than nothing, but would further complicate the tax-collecting and tax-paying ordeals of corporate America. Gary Robbins of Fiscal Policy Associates tells me that much of the messiness could be eliminated if the corporate capital-gains provision could also have a 50% exclusion, as filling out Schedule “d” is already driving businessmen nuts. He figures the cost of doing so would be negligible, less than $10 billion over a decade. 

PLAYING HARDBALL: So far it appears the administration is opting for threats against Senators who are opposing any budget plan of more than $350 billion. The “Club for Growth” which is financed by supply-side Wall Streeters is trying to bludgeon Ohio GOP Sen. George Voinovich into submission, with TV spots in Ohio practically calling him a traitor to the party for his opposition to tax cuts. It is not clear whether or not the White House political director, Karl Rove, is pulling the strings behind the scenes on this Big Stick approach. But Senators of both parties are assuming this is the plan. Trying to force those to do what they really do not want to do is generally a last-ditch effort. There are several senators, Democrats included, who might change their minds if they had better arguments for cutting taxation on capital. I submitted an op-ed with such arguments to a number of publications that are generally considered “Democratic” in orientation and in each case was turned away without comment. The Democrats don’t read the Times. The op-ed appeared in Saturday’s Washington Times, though, which of course is read by almost nobody during Easter recess anyway. But I was advised that the op-ed circulated at Treasury and at the White House, and perhaps will be used when Rove decides to turn to carrots instead of sticks. 

FRIST IN TROUBLE: The administration is now paying a heavy price for deciding to throw Senate Majority Leader Trent Lott to the wolves over his Strom Thurmond joke. As Bob Novak reported yesterday in his column, the White House’s choice as a replacement, Oklahoma’s Bill Frist, made big boo-boo on the tax bill when he made a deal with Finance Chairman Chuck Grassley on the Budget Resolution last week – without informing the House GOP leaders, who he had also made a deal with. He just plumb forgot, which means there has to be some way to get around the Grassley promise to Voinovich and Maine’s Olympia Snowe, that he will not permit a tax bill to come out of conference a penny higher than $350 billion. The White House pulled the plug on Lott primarily because it suspected he would cause some difficulties in the Iraq venture, where Frist would do its bidding. Lott would have handled the tax negotiations much differently, I think. We would not now have a 20% capgains tax rate if Lott had not worked it down from 28% in 1997, with the Clinton administration.

IRAQ: Now that the military phase of the Iraqi venture is complete, it is plain for all to see that there was much less postwar planning than had been generally assumed. The biggest political problem for the administration is that it gave formal assurances to the House and Senate that U.N. “diplomacy had failed” to disarm Iraq and that pre-emptive military action had to be taken to secure the region and our homeland from Iraq’s weapons of mass destruction. As the situation in Iraq gets messier by the day, now with worries about the rise of Islamic fundamentalism as a dominant political force, the White House knows it has to turn up some of those hidden WMD or all the premises of the war will be re-examined. The Democratic presidential contenders to date have not been able to get a grip on the issue as long as the WMD questions remained open. However this all turns out will be a necessary and healthy development in the national discussion about how foreign policy is to be conducted in the future. The problem for the financial markets will turn on how the President’s political capital holds up under this examination, as this would bear directly on his ability to get what the economy needs out of Congress. Sensing this difficulty, the Pentagon is now saying it may take a year for a special team of experts to complete the search.

ROAD MAP: My assumption is that as long as there seems to be progress on the administration’s “road map” toward a Palestinian state, the risks of renewed political terrorism remain low. There is great skepticism that Israel will stand still for any plan that might work for the Palestinians, as that would require painful transfer of those Israelis now living in the West Bank and Gaza settlements. (I don’t know why they could not hold dual citizenships while living under Palestinian authority.) The best hope lately is word from NYT columnist William Safire on Sunday’s "Meet the Press" that Israeli Prime Minister Ariel Sharon assures him by telephone that he is dead serious about getting a peaceful resolution to this issue at the end of his political career, even though it will be very painful for him to go against his real wishes. Any small step in that direction – most directly the transfer of power from Yasir Arafat to a new team Sharon can work with – will further reduce potential for terrorism there and here. And of course add to President Bush’s political capital.