A Day in D.C., July 8 Jude Wanniski July 9, 1985

Tax reform is in much better shape than you'd guess from reading the papers. The July 4 "White House" report that tax reform was going on the back burner came out of Stockman's shop, angering the pro-reformers at White House and Treasury.  Main actors still bullish, confident the process will be fired up again ca. Labor Day and a bill out of Ways & Means this fall.  Buchanan says unrealistic to keep high pitch thru summer anyway.  Meanwhile work goes on "fixing" Treasury II, debate over how to handle problem of two-income family in high-tax state.  Treasury wants to reinstate child-care credit as solution, but right-wingers don't want this concession to "non-traditional" family.  Regan still clings to 10% dividend exclusion, pride of authorship, but everyone else I talked to thinks it's doomed.  Kemp had wanted to trade its $6.5 billion for lower marginal rate, but that seems by the boards.  Talk of trading it in for property-tax exclusion increases, to do several things at once:  Solve two-income family problem; divide Cuomo's anti-reform coalition; halt opposition of pro-public school folks, teachers.  Kemp-Kasten had continued property-tax exemption for these reasons, also because it is proportional tax and tax on capital, not income.  Costs about $10 billion, covered by dividend exclusion and perhaps two more points on corporate rate, to 35% from 33.  The 17.5% capital gains rate said to be safe, because it's only provision that shows dynamic revenue gains a la Laffer Curve.  Sprinkel's shop, by the way, commissioned to do a "dynamic" revenue analysis for Treasury II, so RR can be bolder in taking on reform foes on revenue issue.  In all, very encouraging, given the news accounts of the reform's demise.  When RR re-emerges on issue, likely he will do so angrily attacking foes and their bogus arguments, instead of getting into losing game on numbers, dotted i's, etc.

Sprinkel still running around internally fretting about too much M-1, but he's alone, although Regan still has monetarist twinges.  Fresh from his public spanking by Paul V., Pres Martin blasts M-1 targeting in Sunday Washington Post of 7/7, prelude to almost certain de-emphasis on M-1 on grounds of shifting velocity. Treasury thinks Fed will re-base later this month, simply lifting M-1 targets higher on the "barn wall."

Great joy at White House and Treasury over resignation of Lyle Gramley at Fed, also widely noted he wouldn't participate in July 9's FOMC meeting.  Regan collecting suggestions on replacements, from Martin, Seger, Kemp and others. Monetarists certainly trying to get a Friedmanite in, probably using George Shultz's leverage with Regan (golfing buddies).  With Partee, another hardliner, leaving the Fed Jan. 1, a chance to control FOMC presents itself.  W7ould Volcker quit? No, he'd shift to growth posture and lead the new majority.  Monetarists at Heritage Foundation, a Friedmanite stronghold, urge George Shultz as Fed chairman when and if PV quits.  No way.  Baker and Darman see Shultz as adversary.  Expect Pres Martin and Martha Seger to be more aggressive now that she's confirmed, and help will be arriving in Gramley's replacement.  Good news for growth, bonds, stocks.

By the way, all of D.C. seems aware that Kemp is off and running for '88 and seems surprisingly strong among the experts, with 40% national i.d., heavily among men.  Presidential stuff will subside for the summer but heat up Labor Day. Pressure starts for Lew Lehrman to challenge Cuomo in '86; Lew will decide later this year.