WASHINGTON -- George W. Bush returned to Washington last week ready for the orchestrated Democratic chorus demanding that he submit a new budget. What he did not seem prepared for was congressional Republican fervor for cutting the capital gains tax rate.
Experienced GOP politicians on Capitol Hill, who unlike President Bush must run for office in 2002, peer into the economic abyss and see a Democratic tidal wave. Their answer: invigorate the nation's investment climate with lower capital gains taxes. The president has been unresponsive, saying he is "open-minded" in so negative a tone that he was misinterpreted as saying no.
That's Bush at his worst. He has appeared inflexible and irresolute at the same time, restrained by cautious aides and unable to adjust to new economic conditions. For the first time, Republican leaders in Congress are truly unhappy with their new president. "He does not want to admit that he did not go far enough on his tax cut," said one GOP leader who did not want his name used. Worse yet, the president may have been sensitized by seven months of abuse for being a friend of business.
When Republican leaders returned from their break last week, they found a letter from the economic policy council of the supply-side Club for Growth. Signers included such prominent conservatives as former Federal Reserve Governor Wayne Angell, former Sen. Robert Kasten and former Delaware Gov. Pete du Pont. They proposed an accelerated tax package headed by an immediate cut in the capital gains tax and aimed at 4 to 5 percent economic growth.
Their economic arguments may have packed less punch than the letter's political conclusion: "Continued anemic growth rates will not just mean a Speaker Gephardt and Majority Leader Daschle in 2002, but perhaps even the most economically depressing political outcome imaginable: Hillary Clinton elected president in 2004. November of 2002 is just 15 months away. What are you waiting for?"
The Club for Growth was preaching to the choir in prodding Senate Republican Leader Trent Lott, who has pressed all year for a capital gains cut. House Speaker Dennis Hastert in recent weeks has become a vigorous advocate. When Lott and Hastert met Bush separately last week, Bush gave a wink-and-a-nod signal that he would go along with congressional action.
However, that was far short of overt endorsement, and House Democratic Leader Richard Gephardt praised Bush's publicly voiced neutrality as connoting opposition. Actually, the president seemed frozen by inflexible advisers who insist that the tax rebate -- a Democratic addition to the Bush plan -- should be given time to work. Supply-side critics think the rebate will only statistically boost economic numbers.
Lawrence Lindsey, the president's chief economic adviser, probably shares Federal Reserve Chairman Alan Greenspan's ideological position that, in theory, capital gains taxation should be repealed entirely. Nevertheless, Lindsey has told advocates of a capital gains tax cut that the rebate reduces excessive inventory which might be increased by a lower capital gains cut. This amounts to demand-side, Keynesian economics that Republicans thought had been discarded by the Reagan Revolution.
Bush advisers who oppose a two-year cut in the capital gains rate as only temporary fail to appreciate that it offers an escape from primitive budget rules that militate against needed tax reduction. The revenue gain created by unlocking capital assets permits lower taxation.
Two questions persist for congressional Republicans.
First, can the capital gains tax be cut by Congress with Bush as a passive bystander? GOP leaders are not sure. Last Thursday's caucus of House Republicans did turn into a pep rally for cutting capital gains, and even Democratic presidential hopefuls -- Sens. John Kerry and Joseph Lieberman -- might help a little. However, an aggressive president would be a big help, particularly since House Ways and Means Committee Chairman Bill Thomas is balking.
Second, will it work without a truly accommodative Federal Reserve policy? Meeting with the president last week, Lott told him that Greenspan's policy is still too tight. Seven cuts in short-term interest rates have not worked. Bush reacted as if it was news to him, as if he still really believes $300 rebate checks will turn around the devastation of investors that has occurred during his presidency.