Larry Kudlow

In a surprise move, the president's tax-cut proposal was cut in half in a 51-to-48 Senate vote to reduce the static revenue cost to $350 billion from $725 billion.

On the surface, it would appear that Sen. John Breaux, D-La., out-hustled Majority Leader Bill Frist, R-Tenn., by adding to his amendment provisions that would divert the alleged savings to a war reserve fund and Social Security. In other words, more phony lockboxes.

With these changes, Breaux was able to garner the vote of Sen. Fritz Hollings, D-S.C., who had opposed Breaux's prior amendment submitted last week, which was handily defeated 62 to 38. In today's roll call, Sen. Zell Miller, D-Ga., a Bush tax-cut supporter, was absent. Also, a hoped-for pro-Bush vote by Sen. Ben Nelson, D-Neb., never materialized. Republicans Olympia Snow of Maine, Ohio's George Voinovich and Lincoln Chafee of Rhode Island vote against the president.

On CNBC this morning, Frist aide Bill Hoagland referred to the Bush plan as a "shock and awe deficit." Hoagland, a longtime former budget aide to Sen. Pete Domenici, has never been a friend of supply-side economics. Whether Frist will discipline his new assistant remains to be seen.

In the wake of all this, White House sources tell me that all is not completely lost. Sen. Jim Bunning, R-Ky., intends to submit an amendment that would add back $145 billion to the Breaux resolution, bringing the static revenue cost allowable in the Senate budget resolution up to $495 billion.

Under the whip hand of Majority Leader Tom DeLay, the House passed a budget resolution last week that targeted the president's full revenue package. In a recent meeting with the Texan, it was very clear that his devotion to conservative principles in fiscal, monetary and defense matters is utterly unyielding. Fortunately, speaker Dennis Hastert has given DeLay full backing on key policy votes.

Whatever the Senate outcome, the conference report will reconcile the differing views of the two houses. While there is no hard and fast split-the-difference rule in resolving policy differences between the two chambers, it may be difficult for the president to get a full 100 percent investor tax exclusion for dividends without a successful Bunning amendment.

The fallback position on dividends will, therefore, be a 50 percent exclusion; in and of itself a very strong tax-reform measure that would change the incentive structure both for investor share purchases and corporate deleveraging. Though not as strong as a full dividend-tax exclusion, half a loaf would still be better than none.


Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.
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