Washington Outlook
Capital Gains, Political Loss: Why Bush Won't Bite
If you want to peer into the past, you could dig up a time capsule buried in some building foundation. Then again, you could just visit Washington, where politicians are staging a fall spectacle in retro-politics.
Starring in this season's revival are congressional Democrats, who have reverted to their ancient tactic of accusing Republicans of pillaging Social Security. But now, they must share top billing with Senate Minority Leader Trent Lott (R-Miss.), whose prescription for battling the economic slump is an emergency cut in capital-gains taxes. Lott wants to trim the current 20% rate to 15% for two years. After that? It's anyone's guess.
Since the Dems' scare-the-seniors campaign is about as subtle as heaving a brick through a nursing home window, let's examine the conservatives' latest supply-side foray. Although President Bush is already on the defensive over his $1.35 trillion tax cut and a vanishing budget surplus, supply-siders and Wall Streeters insist that more cuts are needed to blast the economy out of an investment-led slump. Capital-gains reductions have been "a plus for the market and economy in the past," notes Robert Stovall, a strategist for Prudential Securities. "It stimulates profit-taking and a reallocation of funds back into the market."
SELL-OFF? But how to pay for Lott's idea? Because a lower differential between ordinary income tax rates and capital-gains rates would spark a wave of stock sales, the Treasury would see a temporary surge in tax collections--about $2 billion a year, Lott thinks. If the cut is kept on the books, as conservatives hope, the tax tables turn, however. A similar idea passed by the House in 1999 would have lost $51 billion over 10 years, according to the Congressional Joint Committee on Taxation.
Cost issues aside, there's the question of whether further stock sales would be good for an already shaky Dow Jones industrial average. Worries Jeff Lemieux, an economist at the Progressive Policy Institute, a centrist Democratic think tank: "As people sell stock for capital gains, it will cause stocks to fall. That could reduce confidence even more." (A more targeted approach is favored by Senators Joseph I. Lieberman (D-Conn.) and Orrin G. Hatch (R-Utah). They would eliminate capital-gains levies on just small companies and startups.)
The biggest problem with Lott's plan is political. President Bush has labored to structure his tax cut as a series of reductions for individuals. By pushing a capital-gains break now, Republicans on Capitol Hill open themselves up to another Democratic broadside that blasts the GOP for favoring the wealthy. Indeed, 69.5% of the cap-gains relief would go to the top 1% of wage earners, according to Citizens for Tax Justice, a liberal advocacy group. "The distributional problem makes it very difficult for Bush to embrace this proposal," says Marshall Wittmann of the Hudson Institute. "Plus, it would guarantee that Bush crashes into the Social Security lockbox. There's no way he can say yes."
If that's the case, what was the President up to on Sept. 4, when he said he was willing to "take a look" at Lott's proposal? Once again, the Prez is trying to tiptoe across the policy divide that separates his brand of populist conservatism from the Hill GOP's unabashedly pro-business approach. Bush doesn't want to undercut Lott and the supply-siders--or close the door to an eventual capital-gains cut as part of a new tax-reform blueprint.
But in the short term, White House officials think Lott's proposal is spectacularly mis-timed. That's why Wittmann and other Republican mainstreamers conclude that "Bush's `look at it' translates into `fuhgedaboudit'. There's no way Bush can go there this year."
By Lee Walczak and Richard S. Dunham
With Rich Miller and Lorraine Woellert
CAPITAL WRAPUP
Gramm: A Latino Successor?
Republican Phil Gramm's Sept. 4 retirement announcement set off a wild scramble that could result in the election of Texas' first Latino senator. Among the GOP prospects: Representative Henry Bonilla, a rising star in the House. The early Democratic front-runner is former state Attorney General Dan Morales. Also in the Dem mix: Representative Ken Bentsen, nephew of ex-Senator Lloyd Bentsen, and business-friendly Dallas Mayor Ron Kirk.
By Lee Walczak and Richard S. Dunham
CAPITAL WRAPUP
Pitt's Quiet Push
When Gramm was deposed as Senate Banking Committee chairman after Democrats seized the Senate, Wall Street's hopes for streamlining Depression-era securities laws were dashed. But new Securities & Exchange Commission Chairman Harvey L. Pitt is raising financiers' spirits by promising to achieve through regulation much of what Gramm promised by law.
The first thrust: SEC staffers invited securities lawyers and brokers to suggest ways to speed up the registration and offering of new stocks. The American Bar Assn. proposes letting companies approach investors with a wider array of sales literature, relying on antifraud protections to head off "blue-sky" promises. Another key goal: replacing paper prospectuses with Internet access to company disclosures.
So far, Pitt's quiet push hasn't caught flak from Congress. But any attempt to rewrite rules that directly affect investor protection will put the SEC on a collision course with Banking Committee Chairman Paul S. Sarbanes (D-Md.), a fierce critic of Wall Street's ways.
By Lee Walczak and Richard S. Dunham
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Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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