Tax Entitlements, et cetera Jude Wanniski June 11, 1996

When Bob Dole earlier this month announced that he would support a $500 tax credit for charities that combat poverty, he effectively endorsed the creation of a new federal entitlement program. Under the plan, if Bob and Elizabeth Dole each give $500 to such a charity, they are entitled to have their fellow citizens pay them back the entire $1000 by reducing their federal income-tax liability by that exact amount. The cost of the program, like all entitlement programs, would be open-ended, not subject to the congressional appropriation process. President Clinton has weighed in with a proposed $1,500 tax credit, entitling taxpayers who earn less than $100,000 to have their fellow citizens pay them that amount to help pay tuition costs for their sons and daughters at community colleges. This follows the GOP’s Contract With America and its $500 tax credit, which entitles any taxpayer who has a baby to have his/her fellow citizens cough up that amount every year until the baby comes of age. President Clinton also has weighed in with a $200 tax credit for first time homeowners, which means when Chelsea buys her first home, she will be able to get the $200 from mom and dad, who will pay her through the federal tax codes. In this bidding war of new tax entitlement programs, our two major parties, as institutions, have become so corrupted by the quest for political power that it scarcely occurs to their members that they have been driven as far from fiscal responsibility as is the man in the moon. It no longer is possible to imagine how either Dole or Clinton as president next year could even begin the process of writing a new federal tax code. When every citizen is entitled to have their fellow citizens subsidize all their social behavior through the tax codes, the process cannot end until each half of the nation is working full time collecting taxes from the other half, and nobody is left to bake the bread. 

TAX CUTS: Over the weekend it became clear that President Clinton has decided to stand pat for the moment on a tax-cut bidding war. There had been speculation that he would announce some sort of tax cut, including a targeted capital gains tax cut, as a means of pre-empting a Bob Dole tax cut proposal that was supposedly in the wings. With Dole having difficulty deciding what to do and when to do it, the White House’s advantage is in sitting back and doing nothing. Still 20 points ahead in the polls, President Clinton is under no pressure to take fresh initiatives that would give Dole something to outbid. It’s better to wait for Dole and then outbid him. The fact that the GOP convention in San Diego precedes the Democratic convention in Chicago gives Clinton all the time in the world to play his cards. Treasury Secretary Bob Rubin and CEA Chairperson Laura Tyson on separate talk shows announced the party line that the economy is doing just fine without any tax cuts.

THIRD PARTY: Richard Lamm, former Democratic Governor of Colorado, has correctly identified the institutional corruption of the major parties on spending and tax entitlements, but is woefully uninformed on the best solutions. He is openly flirting with the idea of entering Ross Perot’s  Reform Party nominating process, last night telling the NewsHour with Jim Lehrer that he is persuaded that Perot would stand aside as long as a crop of five or six serious contenders entered the lists. If Lamm were the nominee, and even though he came out of the Democrats, his apocalyptic message on runaway entitlement spending would draw more from Dole than Clinton. The message is almost identical to that of the Concord Coalition, which we identify with the Herbert Hoover/Darth Vader wing of the GOP: former Sen. Warren Rudman, Pete Peterson of the Blackstone Group, and Senate Budget Chairman Pete Domenici, all longtime pals of Senator Dole. Perot is a spendthrift by comparison. His Reform Party national co-ordinator, Russell Verney, who was on CNN’s "Evans&Novak" this weekend, confirmed my report (“Clinton, Dole & the Reform Party,” 5-31) that he had met with me to discuss the modalities of a Jack Kemp/Colin Powell Reform Party ticket. It is my wild guess that Perot would prefer a Kemp/Powell ticket to any other combination, as it would clearly have an upbeat approach to fundamental reforms that could cut a broad swath out of the center of the electorate and sweep the Electoral College. Unless a Kemp/Powell draft movement takes hold well before August 18, the date of the RP convention, it isn’t too likely a candidate stronger than Perot himself would show up -- although Lamm has certainly helped the dynamism of the process by breaking the ice. GOP strategists should prefer a Kemp/Powell RP ticket, as it would decimate Clinton’s base, not Dole’s.

GREENSPAN: We suspect the continued bearishness in the credit markets would end if the Senate would confirm Alan Greenspan’s reappointment as chairman. The bear story now is that Greenspan has to raise interest rates no matter what, to prove his credibility as an inflation-fighter. Why? The stock market boom is evidence of coming economic growth, which will produce inflation, and everyone knows Greenspan worries about stock-market bubbles!!! The lead bears at Morgan Stanley are joined by Bear Stearns’s lead bear, Wayne Angell, who for this reason insisted Friday on CNBC that the Fed should raise rates July 2 when it next meets. Angell, a close advisor and protégé of Bob Dole, leaves himself open to charges that he wants to trigger a bear market in order to help Dole. With the price of gold drifting lower as the stock market climbs, Greenspan is smart enough to know that there ain’t no inflationary bubble here. Productivity increases are always foretold by rising equity prices while gold is stable or moving lower. It doesn’t get any better. Greenspan said as much last week in commenting on the solidity of asset values. Out of misguided concern that Greenspan will raise rates as soon as he is confirmed, in order to hurt the Democratic cause, Iowa Sen. Tom Harkin is holding up the reconfirmation vote. This also leads to suspicions that Clinton might prefer to keep Greenspan in limbo, win re-election, and send his own candidate to a Democratic Senate. It looks like there is an opportunity here for a political arbitrage. The bond market is not going to remain as weak as it is with the gold price drifting lower. Either gold goes up or bond yields go down. 

HEALTH CARE REFORM: We applaud the continued gridlock over health care legislation, as it is unlikely anything good can develop in the absence of a general reform of the tax system. The little op-ed in The Wall Street Journal on Monday, “Health Care Reform Starts With Tax Reform,” by two health care analysts, David Kendell and Mark Pauly, is the best summary we have seen on the status of the legislative effort. We began making this argument in the earliest days of the Clinton administration -- that the core problems of our health care system lie within the complexities of the tax code as it has evolved for the last 60 years. There is no way to fix the system by massaging the product that has evolved, which is why all roads lead to gridlock. Any solutions attempted in the current Congress are doomed by zero-sum political considerations. The Ted Kennedy-Nancy Kassebaum bipartisan plan makes it clear that nothing meaningful that passes the Congress can be signed by the President. Democrats are unable to agree to any schemes that place added financial burdens on their constituents. Republicans will not agree to any schemes that involve government any deeper in the health care delivery system, making matters ever more complex and costly. Inherent conflicting interests of individuals and the community of individuals can only be solved by a fundamental overhaul of the tax system, which I believe will require a bipartisan Third Party in the White House.