A Nice Little Rally Jude Wanniski October 4, 2004

Since it hit its recent low of 9988 on September 27, the Dow Jones Industrial Average has climbed more than 250 points. We can’t say for sure what’s behind this nice little rally, but it has coincided with the decision by Chairman Bill Thomas of House Ways&Means to make a big, last minute push for the international corporate-tax bill, FSC-ETI (HR4520). The bill should come out of a hastily assembled House-Senate conference committee tonight or tomorrow, there’s time to have it pass the final hurdles in the few days remaining before Congress suspends for the elections. If it does, we expect the Wall Street rally to extend itself in celebration. If it gets hung up in the Senate, we expect the equity markets to sag in disgust.

Yes, there will eventually have to be legislation to replace the Foreign Sales Corp., but Thomas does not want to take a chance on having it postponed to a lame-duck session after November 2. That’s because there is a good possibility President Bush will not be re-elected and Senator Kerry might prefer to have the legislation postponed to a new Congress, even though it is most unlikely the GOP will lose the House. As President, Mr. Kerry would have plenty of leverage in encouraging the House to shape the bill to suit his political tastes. The conference report will pass the House this week, but Senator Kerry’s fellow Massachusetts Democrat, Teddy Kennedy, is threatening to delay passage unless the report includes Senate-backed language that prohibits the Labor Department from implementing new overtime regulations. Kennedy is also rounding up Republican allies who want the report to include a provision that requires the Food and Drug Administration to regulate the tobacco industry as part of the deal to end subsidies of tobacco farmers with a one-time buyout.

Chances seem better than even for enactment even though the report will almost certainly not contain the overtime provision or FDA authority to regulate tobacco. That’s because Thomas has spent the weekend fashioning the chairman’s “mark” with a great many additions soon to be revealed. We can expect they will be so popular to Democratic Senators facing re-election this year that it will be clear a Kennedy filibuster would quickly fail. Thomas suggests Senators wait to see the conference report before deciding what to do.

This was essentially the game plan that led to passage of the tax-extender legislation a few weeks back, with Thomas holding his fire until he could see Democrats anxious to be able to say they voted for “middle-class tax cuts.” While there seemed to be a possibility Thomas could shoe-horn a provision giving taxpayers the option of deducting state sales taxes from federal taxable income instead of income-tax revenue, that didn’t happen, although it will probably be in the report today. According to the assessment of Gary Robbins of Fiscal Associates, the tax-extender legislation (HR 1308) did not have much of a supply-side kick, but the international corporate-tax bill clearly will. This is the case especially in the provision permitting multinationals to repatriate profits at a favorable tax rate. The White House, by the way, threw its weight behind Thomas in his decision to “go-for-it.” A nice little rally on Wall Street going into November will be helpful to the President.