GOP Tax Strategy Jude Wanniski August 2, 1999

If all goes according to plan, by tomorrow noon the Senate and House conferees will conclude their amalgamation of the tax bills they passed in recent weeks. It won't take long because the GOP leaders more or less decided in advance the approach each side will take and how they will merge them in conference. The $792 billion in cuts over 10 years will then be put on hold instead of being sent to the President for the veto he has promised. The congressional leaders prefer to barnstorm during the August recess, drumming up support for the package, forcing the Democrats into making the kinds of arguments Democrats make about tax cuts for the rich when the poor and elderly need the money in various programs. When they are back from the August recess, they will send Mr. Clinton the bill for his veto, and then sit down in hopes of making a deal. The President insists his upper limit is $300 billion over 10 years, but a number in the $500+ billion range is assumed to be the area of compromise. On CNN's "Evans&Novak" show over the weekend, New Jersey Sen. Bob Torricelli, one of four Democrats who broke ranks and voted for the $792 billion package, indicated his belief that if the legislation were trimmed down to the $500B level, it would have broad bipartisan support. He said he would have to warn the President, implying a veto override. Even before negotiations begin at that level, House Majority Leader Dick Armey has announced his willingness to scrap the 10% across-the-board cut in marginal income-tax rates that is in the House bill. The Senate will give up the little marginal rate cut contained in its bill.

What is left to work out is the strategy that will be employed in September -- a legislative strategy or a summit strategy. This is because there are three areas that can be mixed into the deal. There are still appropriation bills to be worked out. There are the Medicare problems to be worked out. And there are the tax issues to be dealt with. Those who prefer the legislative strategy believe it more likely to produce a tax bill the President would sign. This would involve moving each element along on three parallel tracks, thereby gaining the kind of leverage you only can get by being in control of Congress. In a budget summit, there is the President on one side and the Republicans on the other, and the leverage goes to the President. The GOP plan is to use the Coverdell-Torricelli elements which are scattered in the two bills to get a 15% capital gains tax, a bracket-widening between 15% and 28% coupled with an adjustment on the marriage tax penalty, an adjustment on estate taxes, and maybe something on the Alternative Minimum Tax.

The Republicans should be in a strong negotiating position, knowing the Democrats want to be in on tax cuts too. They have played the politics of surplus so defensively, though, that they can wind up being rolled again by the President and his team, conceding much more after they having put 75% of the projected surpluses off limits. Not a single Republican has made the supply-side argument that without more rapid, non-inflationary economic growth, the Social Security and Medicare problems cannot be solved. Instead they talk only of giving money back to the people "so they have more in their pockets" and preventing the Congress, which they themselves control, from spending the surplus. Unless they change their pitch during the August recess, insisting the right kind of tax cuts are imperative to growth, they might come back from their barnstorming with their tails between their legs. Otherwise, the strategy looks okay.