Thrashing around at Ways & Means Jude Wanniski July 20, 1989

Watching Rep. Dan Rostenkowski and the folks at Ways & Means trying to write tax legislation under the pressures of Gramm-Rudman budget reconciliation is not a pleasant sight. It requires a strong stomach. The committee Democrats are twisting every which way to avoid a cut in the capital gains tax, and as Richard Darman predicted months ago, they should soon cave in anguish and exhaustion. The stock market gyrations, we think, are almost entirely due to the mishmash of reports on this ugly process.

We were especially alarmed Tuesday morning with the report in The New York Times that "Retreating on Pledge, White House Hints at Tax Increase to Aid Elderly." The report, written by Martin Tolchin, who is not the regular tax reporter, indicated that Darman was prepared to accept an increase in the Social Security wage base, to $60,000 from $50,700, to offset costs of reducing the surtax on catastrophic illness. This couldn't be true! It would mean that Darman, the administration's strategist par excellence, had a quackup. Exactly at the moment we've been waiting for -- the Democrats begging for a way to cut the insurance surtax -- Darman gives them a duck instead of forcing capgains down their gullet. As it happened, the story was "false and misleading," as Darman told the House Budget Committee. Actually, Darman didn't know Tolchin was a reporter, but assumed he was a committee staffer working on an option paper. Tolchin, thinking he was getting a scoop on a policy shift instead of technical assistance from the OMB director, ran with the story, which the Times almost trumpeted on its front page. Jeffrey Birnbaum of The Wall Street Journal, who is rooting for a tax increase, the following day reported that in the tax package of cats and dogs that Rostenkowski cooked up Tuesday, he "did avoid recommending one tax-increase measure that White House Budget Director Richard Darman told lawmakers he might accept: an increase from $60,000 from $50,700 of the ceiling on wages that will be subject to Social Security taxes." Arrrrgh.

We're told a minority of the Ways & Means Democrats are prepared to go for capgains, enough to vote it out of committee. But Majority Leader Richard Gephardt is fanatically opposed to the idea and is prepared to go to war over capgains. Gephardt, who believes Japan bashing, trade protectionism, and taxing the rich are all populist winning issues for the Democrats, is frothing at the mouth over Darman's strategy. Darman's hole card is sequestration, but it's conceivable Gephardt (and Speaker Tom Foley, who seems to be in Gephardt's pocket) will rally the party via the liberal Democratic Caucus and swallow sequestration rather than the hated capgains cut.

The libs are really determined to put the party under this kind of pressure, reminiscent of Goldwater's "Choice, Not an Echo," of a quarter century ago. No matter how many times their issue lose for them, there's always a leader persuading the flock that "if we only had a little more money, we could have gotten our message across." We can already smell a Gephardt-Jesse ticket in '92.

Chances are still 50-50 that Darman's strategy will pay off this year, that a bill will narrowly emerge from Ways & Means and win on the floor -- given the package of goodies it will be tied to and the nasty alternative of sequestration. If the libs prevail this year, chances increase to 90-10 for passage next year, when the Dems must face the same hammer again. Gephardt's issues are statist, not populist at all. They are fundamentally losers as the politics of envy, and as long as George Bush understands that and sticks to the politics of growth, he'll win on capital gains.