The serenity of a Bush Cabinet meeting was disturbed Tuesdaywhen Secretary Jack Kemp of House and Urban Development intervenedwith an impassioned call for more militant efforts to cut the capitalgains tax. Significantly, Budget Director Richard Darman did notdisagree.
The Wall Street Journal's lead editorial that morning, "Capitalgains sellout," reported that Darman and Treasury Secretary NicholasBrady "seem to have agreed on a package throwing in the towel on acapital gains cut" in negotiations with Congress. That followedrising paranoia on the Right that Darman was agreeing totax-increasing measures.
In fact, the Darman-negotiated budget agreement about to emergedoes not violate George Bush's read-my-lips campaign pledge againstnew taxes. Although it will call for $5.3 billion in unspecified"tax measures" to be determined later, that represents no change fromthe president's Feb. 9 budget proposal. Nor has there been anyretreat in Darman-Brady estimates that lowered capital gains rateswould bring in, coincidentally, just about the necessary $5 billion -a revenue-boosting "tax measure."
Thus, reports of a sellout are greatly exaggerated. ButDarman's deal is only the end of the beginning of the long faceoffbetween the administration and Congress on the budget.
The question ahead is less whether Bush fudges on an economicallyirrelevant tax package than how he passes this test: Can a Republicanpresident endure demagogic abuse for vetoing a minimum wage increaseand at the same time pressing for a capital gains cut?
The paranoia is well-founded. Time and again during the Reaganadministration, Republican congressmen found the end product of thebudget process was unwanted tax increases. Suspicion of Darman isintense.
It hardened even more when Darman talked House Republicans out ofa resolution by Rep. Dick Armey of Texas to put the party on recordagainst any budget deal calling for higher taxes. Darman told themsuch action by the House GOP Conference would be "insulting" to Waysand Means Chairman Dan Rostenkowski just as negotiations with himreached a crucial phase. GOP leaders agreed, but Armey's subsequentwarning to the conference encouraged unease.
Shortly thereafter, word seeped out of the negotiations thatDarman had accepted House Budget Chairman's Leon Panetta's $14billion in new revenues, around $5 billion of which would be in newtaxes. Was Darman flinching?
The truth is that the $14 billion and $5 billion are straightfrom Bush's February budget proposals. How the $5 billion will beraised will not be clear for months. The pertinent question, then,is how steadfast the president will be in asserting, against outragedDemocratic protests, that it could be raised by additional revenuegenerated from lower capital gains rates. A reduced rate wouldstimulate extra revenue by increasing capital gains transactions.
This was the point Kemp made at the when he interrupted Tuesday'ssoporific Cabinet session. But Kemp was in no way implying a Darmansellout or worrying about that mysterious $5 billion new revenueplug. He wanted more effort in selling a reduced capital gains tax,not to sate the idle rich but to help the working poor. Darman'sresponse signaled that the proposal was alive and well.
Darman has had access to a monograph by supply-side economistAlan Reynolds asserting that the 1986 increase in capital gains rateshas had unexpectedly severe effects in shrinking state and federaltax revenues and creating competitive disadvantages for the UnitedStates internationally. While arguing long-term revenue gains,Reynolds declares: "A high capital gains tax is a mechanism forkeeping the little guy down." Darman's dealing permits the way forthe president to intensify that argument.
Evans & Novak are nationally syndicated columnists of theChicago Sun-Times.
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