The Contract Bogs Down Jude Wanniski March 23, 1995

To understand why the Contract With America is running into such difficulty, we must remember it was designed by Newt Gingrich last fall without a consensus among Republican intellectuals. He picked the 10 Contract items from a list proposed by his young GOP pollster, Frank Luntz. Each of the items scored well in the Luntz surveys. The $500 tax credit for children was the exception, Gingrich giving it to the Christian Coalition in exchange for their Contract support. Luntz publicly supports the tax credit, but privately admits that his focus groups reject it. It is straight subsidy, which the pro-lifers see as a force against abortion, rewarding working families who hang together. It is very bad economics, though, which Gingrich did not consider when he cut the his deal. Scored on either a static or a dynamic basis, it loses money. In fact, it loses more money on a dynamic basis than on a static basis, relieving working families from seeking higher income to improve their conditions. This disincentive, when added to the dead loss to Treasury, subtracts from national economic efficiency, making it harder for families to advance living standards. It is more likely to cause family dissolution. It is a terrible scheme, a loser all around.

These chickens are now coming home at the roost of Chairman Bob Packwood of the Senate Finance Committee. No wonder he is carrying on about the urgency of balancing the budget before any taxes are cut. From his perch, here is how it must look: If the House sends over the tax bill as is, the only way he can get the capital gains tax cut that he would like to have is to accept some version of the kiddie’s tax credit. If he does that, he will have to support the deep spending cuts associated with the welfare reforms, summer job programs, school lunches, etc. His fellow Senators tell him they will not be able to support the House spending cuts to this degree in order to finance the tax cuts. The only way out of this cul de sac is to oppose all tax cuts, which saves enough money, about $189 billion over five years, to be able to buy school lunches and summer jobs galore. 

This political bog would not have been encountered if the decision had been made to design the Contract around a dynamic scoring of the capital gains tax. The Contract, though, was designed prior to the November 8 elections, which discouraged Gingrich and Armey from using dynamic scoring. They would have had to defend the numbers against the numbers of the Democratic 103rd Congress. Newt, advised by Luntz the pollster, was concerned that their numbers would have been laughed off the campaign circuit. Luntz, who has now been credited with the GOP victory on November 8 by virtue of his polling, has become a major problem for the GOP’s political future. Issue polls are worse than worthless, as all pollsters are forced to draw from a population pool that has not given serious consideration to the issue in question; this is why they elect politicians in the first place. Luntz’s polls showed the public enraptured by the idea of a Balanced Budget Amendment, a mistaken reading of voter intent that led to this cul de sac. On Crossfire last night, Luntz, now elevated to the status of “Republican Strategist,” announced that the battle cry in 1996 will be the BBA!! He also asserted that the purpose of the tax cuts is to deny the government revenue, a statement that calls for the horsewhip. Another awful Luntz dictum is his insistence that “the national mood” demands that Congress cut spending first and taxes later. This is also the GOP voice of Hoover past, and David Stockman and Dick Darman, the the folks who gave the GOP 60 years in the minority wilderness. Alas, even my old friend Bill Kristol, another favorite GOP strategist of the talk shows, has been swept up by the budget-balancing fever and has put these worthless issue polls ahead of economic growth. We are supposed to believe the American people prefer “term limits” to an expanding economy, higher real wages and greater job opportunities. 

Not one Republican in the Republican-controlled Congress is discussing economic growth as the objective of governance. If they were doing so, they would be discussing the tax issue that now confounds them in terms of growth, not income distribution or cultural behavior. The liberal Democrats are winning the public relations battle because they are exactly right in their arguments: The expensive social safety net is sagging with the weight of the underclass because there is no opportunity for that underclass to climb out of it. The weakness of the national economy should not be blamed on the Democrats, whose role as a party is to oversee the collective welfare. It is the role of the Republican Party to produce economic growth and opportunity, to oversee and maintain the spirit of entrepreneurial capitalism in the land. Instead of doing this when it gets its hands close on the levers of power, it lunges after the budget deficit. To this sterile end, its leaders break “read my lips” promises on raising taxes. They get mandates from the voters to cut and index the capital gains tax and then they swap it for nickels and dimes in social spending cuts. They cheer the Federal Reserve when it raises interest rates to slow inflation by keeping people out of work. They denounce affirmative action for those who are always the first to lose their jobs. And now they say they love the poor more than the Democrats do, because they believe adversity builds character. 

Rep. Charlie Rangel of Harlem and the Congressional Black Caucus are right to scream that the GOP is conducting itself in a mean-spirited, heartless manner. What Rangel sees is a GOP that is financing the capital gains tax cut with school lunches and summer jobs. This is because capgains was scored as a $53.9 billion revenue loser over six years and $170.3 billion over ten by the bureaucrats of the Joint Tax Committee. Rangel would love to cut the capital gains tax, but how are we to expect him to do so if he has to take it out of peanut butter sandwiches and summer jobs for the kids in Harlem? There is already sufficient character-building adversity in his district. 

There is a painless way out for the Republican leadership, which begins by sending their pollsters on vacation followed by: 1) Announcing that they are abandoning the $500 kiddie credit and substituting a $500 increase in the personal exemption for everyone, including billionaires (who can’t wait to save the taxes on another $500). Senator Gramm, bless him for this, has already suggested the idea. This replaces a subsidy for loafing with a reduction in the marginal penalty for working, with unambiguous benefits to families with or without children. The substitution of the exemption for the credit costs far less even though all taxpayers are covered instead of only kids in families below $200,000. This is because the exemption comes off gross income, not net taxable liability. The Christian Coalition lobbyists should be happy; at least Christians will be. 2) Having the Joint Tax Committee recalculate the indexing of capital gains, retroactively and prospectively, according to realistic formulas. It must, though, incorporate the unassailable research and analysis of Gary & Aldona Robbins, who have caught the JTC in flagrant errors. Merely weeding out the errors produces a positive revenue swing of $150 billion in five years. The growth would produce almost as much in state and local revenues! JTC bureaucrats now being praised for demonstrating that higher rewards to capital produce less capitalism. 3) Using the savings from these simple steps to restore some of the funding to Rangel’s social safety net. His constituents should not have to take the brunt of the risk that tax cuts will expand the economy. Although we believe better jobs and more capital will show up in Harlem as a result of the capgains reduction, the federal government should bear that risk. The Darmanesque preference of cutting spending first is designed to put the risk on the backs of Rangel’s constituents instead of the nation’s. Most of the savings should come from people climbing out of the net, not throwing them out.

Are these adjustments too much for Gingrich to handle? If so, he should step back from the Contract and ponder the alternatives. The November 8 elections were a low-risk way for the American people to give the GOP its first shot in 40 years at control of Congress. President Clinton is in the White House, ready to defend school lunches, summer jobs, widows and orphans. We continue to congratulate Newt for the Contract With America, the perfect battering ram to change the terms of debate. Unless he meets Rangel’s concerns, however, the people will have no choice in 1996 but to continue divided government.