A lot of things are breaking right for George W. Bush’s broad-based tax-cut plan. Alan Greenspan’s epiphany on lower interest rates and tax rates is the fastest conversion in the history of the Damascus Road. Georgia Sen. Zell Miller’s endorsement of the Bush tax cut resets the political stage for bipartisan support, especially by Democrats from flyover states, where Bush had huge majorities.
Veep Dick Cheney, who forecast last December that the economy was on the “front end of a recession,” turns out to be more accurate than either Wall Street or Fed gurus. And, of course, the president himself from the inaugural speech right on down the line has been steadfast in his support of supply-side tax cuts.
But one unexpected player who is bolstering the cause is a resurgent Trent Lott. The Mississippi senator has been a front-and-center spokesman for Bush’s tax-cut program, arguing in press interviews and TV talk shows that across-the-board relief from high marginal tax rates is essential. Lott is telling people that “class warfare won’t sell this time. Tax cuts must go to those who pay taxes. We’re not about to create another welfare program.” And he is insisting on a retroactive tax plan.
Even more, Lott has become the leading advocate of a lower capital-gains tax in Congress. This is a real sleeper issue, one that might well emerge in a final tax package.
Yesterday Dick Armey publicly signed on to the cap-gains cut proposal. And indeed, Armey’s letter to the House Republican Caucus a few weeks ago supporting broad-based tax cuts was a big help to Bush. But Lott has been the leader on cap gains, and what’s so interesting is that the Deep South senator has not been this strong on the supply-side for many years.
Senior Lott staffers tell me on background that the Senate Majority Leader has been liberated with Bush in the White House and Clinton out. “He was always a close friend of Jack Kemp’s and a supporter of supply-side ideas,” I’m told. “But now he believes he can turn to the offense and be much more aggressive.” Lott’s reasoning is straightforward and constructive. He believes that a lower cap-gains tax would promote more capital formation and higher productivity, leading to a stronger economy. This, he believes, will provide additional budget resources to finance long-term Social Security reform. And he wants to reduce the cap-gains tax rate to 15% from 20%, making it retroactive to January 1, 2001.
The issue of cap gains is a very interesting one. Recent Treasury Department data show that the 1997 cap-gains tax cut produced a flood of new revenues. Over the past four years, cap-gains related tax revenues at the 20% rate have produced an average of more than $90 billion in tax receipts per year, accounting for virtually the entire on-budget non-FICA surplus. In the early-to-mid 1990s, however, the 28% cap-gains tax generated only $35 billion per year in federal receipts.
Given the downturn in business investment and venture capital, there’s no question that a reduction in the cap-gains tax will unlock a flood of new risk-taking that could reinvigorate investment by technology entrepreneurs, small-business owners, and more traditional sectors of the economy.
Also, the positive revenue effects from a lower cap-gains tax rate will help finance the acceleration of Bush’s income-tax-rate reduction plan to a Jan. 1, 2001 start date. Really, the cap-gains tax is the best example of the Laffer Curve effect, whereby a lower tax rate produces additional tax revenues by improving economic rewards and promoting economic growth.
While the Bushies have not publicly embraced Lott’s cap-gains plan, they haven’t rejected it either. “There have been no negative comments,” I’m told, “and many key White House people have winked and nodded at the possibility that cap gains could be added to the overall package.” Meanwhile, Wall Street Journal columnist Paul Gigot has reported that Sen. Lieberman favors a lower cap-gains tax, and in the past Democratic Sen. Robert Torricelli of New Jersey has been supportive. There’s even speculation that Sen. John Kerry (D., Mass.) might be for it in order to bolster his New Democrat credentials in a possible presidential run.
Stock markets have revived this year in large measure because of positive expectation for potentially lower tax rates — it’s not all about Fed easings. If cap-gains relief is added to the package, markets will rejoice with a terrific rally that will bolster Bush’s first-year economic and political credentials. After all, market wealth is a lot more important than GDP. And the investor class will be grateful to Trent Lott.