The ultimate compliment for David A. Stockman came at a recent cabinet meeting from Defense Secretary Caspar Weinberger, himself known as Cap the Knife when he served as former President Nixon's budget director. Stockman accomplished in a few weeks the kind of budget revision "that would have taken anyone else at least a year," Weinberger told his colleagues.
In no small measure, President Reagan's ability to achieve an objective of 20 years' standing -- presentation of a program to cut the size of the federal government -- was made possible by Stockman's blue-print. Until the workaholic Stockman took over, the Reagan program was mere rhetoric.
With some exceptions, the Stockman knife hit almost every corner of government -- even museums, the arts, and public TV and radio didn't escape.
But there were some sacred cows, notably such tax expenditures as oil depletion allowances and what everyone in this town used to consider "tobacco subsidies." On the latter -- a genuflection in the direction of Sen. Jesse Helms (R-N.C.) -- Stockman pleads that the tobacco market may be rigged by a federal acreage quota system causing consumers to pay higher prices, but said that no budget monies are involved. But nobody including Stockman, has proposed unrigging the tobacco acreage system as one way of contributing to the lower inflation rates Reagan says he wants to achieve.
Weinberger's tribute to the 34-year-old head of the Office of Management and Budget was passed along by Treasury Secretary Donald Regan, thought by some to be chafing in a second-fiddle role in the Stockman band. Regan has yet to live up to his billing as the president's chief economic spokesman. But the former Merrill Lynch boss seems increasingly secure in his role, and professes to be untroubled by the tons of publicity heaped on Stockman.
"It was only natural," Regan says, "that with a bright, young and energetic guy like Dave Stockman, and an old-timer like myself new to town that some in the media would see the classic conflict story."
As a matter of fact and not surprisingly, there were some disputes between Stockman and Regan in the formulation of a program so dramatically different as Reagan's. Regan, although comfortable now with supply-side economic philosophy, couldn't buy the earliest, far-out economic projections developed by Stockman aides John Rutledge and Lawrence Kudlow. Nor, as it turned out, could Economic Council Chairman Murry Weidenbaum, and these forecasts were toned down.
On at least one highly critical tax question, Stockman and Regan were together -- and lost out to White House political advisers. That happened when they proposed to lower the 70 percent top marginal tax rate on "unearned" income to 50 percent right away.
White House politicians feared that this would be seized by Democrats as evidence of a "rich man's tax bill." Even Democrats anxious to support the bulk of Reagan's program would be put off, the White House pols argued. The president referred this one, and came down against Stockman and Regan, sticking with the Kemp-Roth pattern that will bring the 70 percent rate down to 50 percent in three years.
Then there was the question of how to deal with the pet tax proposals of influential congressional Republicans -- indexation of the tax brackets, ending the so-called "marriage penalty" (costly and very popular), a special tax exclusion for interest and dividends, a sharp reduction in capital-gains taxes, tuition tax credits and lower inheritance taxes among them.
Stockman supported pressure from the Hill for one omnibus tax bill. But Regan and his Treasury team urged a two-stage approach, involving first a "clean bill" focused only on supply-side measures. Regan was worried that cluttering up that would invite a "Christmas tree" bill and delay the whole process, Regan worried.
The president bought the clean bill approach and, in his address to Congress, said that stage two of the tax proposal could come later. He carefully omitted an endorsement of special attention to captial gains or to interest and dividends exclusions, assuming that the Kemp-Roth rate reductions will effectively do the same job.
For example, Regan says, "the first crack out of the (Kemp-Roth) box" will reduce the effective capital-gains tax from a present maximum of 28 percent to 25 percent, something Wall Street has been begging for.
The arithmetic is simple: The first 10 percent Kemp-Roth reduction will reduce the 70 percent top rate on unearned income to 63 percent. Since 60 percent of any captial gain is excluded, the tax liability would be 63 percent times 40 percent, or 25.4 percent. By the end of the third year, the top capital-gains rate would be cut to about 20 percent -- and far under that in any but the highest income brackets.
One significant consequence of Kemp-Roth -- if it goes through -- is that the tax distinctions between "earned income (wages and salaries, etc.) and "unearned" income (interest, dividends, capital gains) will essentially have been wiped out. And with that discriminatory difference eliminated, much of the incentive to set up tax shelters would evaporate.