The Greenspan Commission Jude Wanniski January 31, 1991

President Bush's State of the Union announcement that he has asked Fed Chairman Alan Greenspan to form a commission that will examine the merits of the capital gains issue -- even as the President has revived his call for a lower rate — has dramatically increased chances he'll get his wish sometime after hostilities cease in the Persian Gulf. A big portion of the 50-point move in the DJIA yesterday -- with a 10-point NASDAQ splurge -- had to reflect this positive development. The New York Times observes editorially today that "Mr. Bush renewed his obsessive, and benighted, campaign to cut taxes on capital gains, but even here the call was half-hearted, even defeatist, and he shunted off the idea to a new commission to collect facts." The Wall Street Journal's Washington bureau, which remains obsessed in its opposition to a capital gains tax cut, reported Wednesday that "Mr. Greenspan is a partisan in the capital gains debate," in that "Just last week, he told a congressional committee 'I've always been supportive of lowering the capital-gains tax or preferably eliminating it.'" Most importantly, Greenspan had testified before Senate Banking that "there's no doubt in my mind that a capital-gains tax cut would be helpful with respect...to property values and economic growth."

The idea grew out of a meeting I had with Greenspan in his office December 4, where I advised Greenspan that Henry Kaufman had just publicly called for elimination of the tax and that Ted Forstmann of Forstmann, Little & Co. had written an article that would soon appear in The Wall Street Journal ["Blame the Tax Code, Not Milken, for Junk Bonds," Dec. 13], which would also argue for a "substantial cut" in the capital gains tax and a zero tax after a three year holding period. Greenspan told me he had always believed there should be no tax at all on capital gains, that it is simply a tax on capital formation, "in a way, a tax on the standard of living of all Americans," is how he put it precisely. This of course does not make him a "partisan," but reflects his point of view as an economist. It is precisely because he has been sensitive to the partisan nature of the capital gains issue that he has maintained a passive role in it, only responding to questions about it when they are raised in official proceedings.

After the meeting, I advised HUD Secretary Jack Kemp of Greenspan's position, and he was so startled that he could scarcely believe me. As both are members of the Resolution Trust Committee, Kemp called the Fed Chairman and arranged a breakfast meeting the following week. At the breakfast, Greenspan, according to Kemp, repeated his position exactly as he had conveyed it to me, also explaining that because of the partisan nature of the debate he would not enter it, except insofar as the President asked him his views on capital gains. Whereupon Kemp sent the President a handwritten letter urging such a meeting, as Greenspan's views in light of the banking crisis would change the terms of debate on capital gains, putting the liberal "fairness" argument into perspective. The letter became the buzz of the White House senior staff, and the President called Kemp on Christmas Eve, telling him he'd read the letter and found its contents persuasive. Kemp thereafter would not discuss further developments with me, having pledged secrecy, but I was aware that he had lunch with the President and White House Chief of Staff John Sununu early this month; it is almost certain they discussed the matter at length. Although I am not sure, the idea of a Greenspan "commission" has all the earmarks of Budget Director Richard Darman, and is in fact an inspiration. Having failed to deliver on capital gains in '89 and '90, Darman appears to be back in action on the supply-side. The fact that the commission is open-ended, with no specific reporting date, will permit the commission to report at a time that is convenient -- certainly after hostilities cease in the Gulf.

What the commission will accomplish most of all is to take the capital gains arguments away from the politicians and put it in the hands of the economists. There has always been far more support for capital gains reduction -- certainly the indexing of capgains -- among professional economists, including those identified with the Democratic Party. In the same way that Greenspan is wary of being viewed as a GOP mouthpiece, many Democratic economists are wary of injecting their views into the political debate for fear of being political traitors. In 1978, while still at The Wall Street Journal, I recall the late Walter Heller -- who had been John Kennedy's chief economic advisor — calling to tell me he didn't have any fresh ideas to write for his monthly essay for the editorial page. I suggested he write his views on the debate that had just surfaced about the Steiger Amendment, to cut the capital gains tax in half. Dr. Heller, then at the University of Minnesota, told me he "wouldn't touch the issue with a ten-foot pole," as he basically agreed with Steiger, but that his public support would cause him to be anathema within the Democratic Party.

Of great importance is the fact that all of the political institutions in Washington have been compromised in one way or another on capgains except the Federal Reserve Board. Treasury Secretary Nick Brady fought against the revival of capital gains on the grounds that the Administration could not win the debate over revenue scoring -- which may be true insofar as the Administration's own computers were programmed in a way that minimizes the importance of capital gains. In my December meeting with Greenspan, I pointed out that the Fed would be able to demonstrate that the importance of federal capital gains reduction goes far beyond its impact on Treasury revenues, even in Treasury's weak scenario. It is unambiguous that the lower federal rate would increase state and local revenues, by increasing economic activity and real estate values — thereby reducing pressures on the nation's governors and mayors and expanding the value of core capital in the banking sector. These issues have never been explored in the two years of debate over the budget, the thrift crisis, and the credit crunch. They will be, finally, when the Greenspan Commission meets, and the "Fairness" argument will be squashed beyond recognition. A second benefit is that Greenspan is now assured reappointment as Fed chairman, and will be able to resist Treasury's incessant demands for monetary ease. In this morning's Times, in fact, Greenspan confidently rejects the idea that he should have been easier in the past. He also rebuffs the monetarist assertions that he should be worried about money supply as a primary consideration. Nick Brady has lost all the way around.

Who, though, will be on the commission? No doubt a scattering of politicians and economists identified with the two parties. With Greenspan as chairman, we will assume the makeup of the commission will have maximum credibility. As we know where his mind and heart lie at the outset, we can also assume the issues will be debated on their merits so thoroughly that even The New York Times will have to find something else to complain about.

What will be the upshot? The Administration's proposal is the same as last year's watered-down effort produced by Nick Brady -- cutting the 28% to 19.6% after a three year holding period. At the same time, Minority Whip Newt Gingrich and the other GOP growth forces in the House and Senate will continue to push a plan inspired by Forstmann's zero rate after three years. The Democrats will eventually resort to their bottom line, indexing alone without any rate change. As the Greenspan Commission unfolds and as the public becomes engaged in the seriousness of the issue, there becomes more and more chance that differences will be split between the Brady proposal and the Forstmann plan. But I suspect the political world will have changed unalterably as a result of the commission hearings. It will amount to the first official discussion about the essence of entrepreneurial capitalism in our time. The outcome can only help. I'm thrilled to pieces.