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Jewish World Review Feb. 15, 2001/ 22 Shevat 5761

Lawrence Kudlow & Stephen Moore

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Consumer Reports


Grow the Bush tax cut

http://www.jewishworldreview.com -- THE stars are more magically aligned for tax cuts today than at anytime since perhaps the start of Ronald Reagan's presidency 20 years ago. The latest estimate for Uncle Sam's budget surplus over the next decade has been raised yet again by another $1 trillion. (Just as the two of us have long predicted.) Fed chairman Alan Greenspan is now jawboning in favor of tax reduction, not against it. Economic growth has slowed to well below its potential rate and recession cannot be ruled out. The latest Zogby poll shows that voter ambivalence about tax cuts six months ago, has now changed to rip-roaring 2-1 margins of support among an increasingly nervous American workforce.

All that said, the only thing Congress should fear is to fear itself. This is no time for timidity. Long-term technology advance, job creation, productivity and global leadership are at stake.

A number of Republicans and Democrats on Capitol Hill continue to protest the $1.6 trillion ten-year price tag of the Bush tax cut plan. That sounds like a huge number, but in reality it's only between 1% and 1.5% of GDP. Reagan's supply side tax cuts in 1981 were twice that large. Republicans should be expanding the Bush tax plan, not shrinking it.

Why? The latest budget forecasts suggest that the budget surplus over the next 10 years will exceed $5 trillion. Even if Medicare and Social Security trust funds are carefully locked away (we refuse to use the term "lock box"), the operating budget surplus for the federal government will be close to $2.2 trillion over 10 years.

That leaves room for a tax cut nearly 50% bigger than Bush's. Anyway, the economic growth impact of marginal tax-rate incentives will far surpass static revenue estimates.

We've been working with a caucus of pro-growth Republican House members including, Reps. Paul Ryan of Wisconsin, Pat Toomey of Pennsylvania, Jeff Flake of Arizona, and Mike Pence of Indiana, on a bill that would inject additional economic steroids into the Bush tax package. We call it the Bush-Plus Tax Bill.

Here is what would be added to the Bush plan:

  • 1) Cut all income tax rates immediately and retroactively to January 1, 2001. The Bush plan would phase in income tax rate cuts from 39.6% to 33% over 3 years. The economy needs the pro-growth stimulus from tax rate cuts right now -- not in 2003. People will defer investment and other forms of economic activity until lower tax-rates kick in. Delaying the tax-cut will actually prolong the economic slump. Tax rate cuts are the most critical feature of the Bush plan, because they stimulate saving, investment, risk-taking, and additional foreign capital flows into the United States. In the past 30 months, Ireland, Japan, Germany, and France have all cut their top tax rates to better compete with the U.S. It's been 15 years since the U.S. cut tax rates. Our relative tax advantage has eroded. It's time to cut rates again.

    2) Repeal the death tax immediately. The GOP death tax elimination plan is defective. It would phase out this tax over 11 years. A later Congress can come along and suspend the phase-out. Immediate repeal is the best option. The tax is fiscally irrelevant: it raises only about 1.5 percent of total federal tax revenues. The death tax is economically counterproductive because it penalizes those who save and rewards those who consume all their wealth before they die. The United States today has the second highest death tax (55%) in the industrialized world; only Japan has a higher estate tax. We should strive for the lowest rate.

    3) Expand IRA and 401k supersaver accounts. Want Americans to save more? Stop double-taxing their savings. IRAs and 401k's are extremely popular and effective pro-savings vehicles. They should be dramatically liberalized by raising limits by $5,000 per year. The goal should be to eventually create unlimited supersaver IRAs, where any money that is saved out of income is not taxed, until the funds are taken out of the savings account to be spent. The income limits for IRAs should be repealed too.

    4) Cut the capital gains tax to 15%. The previous capital gains tax cut from 28% to 20% has been an unqualified economic and revenue success. In fact, capital gains-linked tax receipts have roughly tripled from $35 billion annually in the early mid-1990s to over $100 billion in 2000. With this in mind, a lower cap gains rate will help finance a front-ending of the full income tax-rate reduction plan made retroactive to January 1, 2001. The after tax-rate of return on capital rose, thus lifting stock values. It is also noteworthy that with half of Americans now owning stock, the public support for lower capital gains taxes is higher now than ever before. This is no longer the rich man's tax.

    5) End real income bracket creep. Real income bracket creep is a hidden and unlegislated form of taxation wherein the tax collector snatches away an ever-growing share of worker income year after year. Over the next decade nearly 20 million Americans will be kicked into a higher tax bracket because of real income bracket creep.

Tax brackets should be raised each year by the increase in average incomes. If Congress feels compelled to take more of workers' pay checks, the members should be required to vote to raise taxes.

The Republican leadership on both sides of Pennsylvania Avenue would be wise to embrace the plan by Reps. Ryan, Toomey, et al. Their approach of a supply-side incentivizing tax cut would not just regenerate growth in the short term, but would also help get the economy back on a higher long-run growth path of perhaps 4 to 5 percent per year.

Tax cut opponents worry that the higher budget surplus forecasts coupled with Alan Greenspan's green light on reducing taxes could cause "a tax cut feeding frenzy" in Washington. We sure hope they're right.


JWR contributor Lawrence Kudlow is chief economist for CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Stephen Moore is president of the Club for Growth in Washington, DC. Send your comments about his column by clicking here.

Up

02/08/01: The Breakfast Club
02/01/01: Shifting Political Winds
01/27/01: Inflation tax-cut
01/25/01: The Philadelphia Story
01/17/01: New Bull?
12/19/00: Help is on the way
12/04/00: Slumbering spirits
09/19/00: Euroland Tax Revolt is Good for the Europe
08/24/00: Tax Cut Issue in Campaign
07/31/00: Mr.G., you’re gaining on it
07/26/00: Investor Class Rising
07/17/00: The rising tide of national prosperity is lifting all boats
07/11/00: On Soft landings
06/29/00: Is the sky falling?
06/21/00: Internet-more-important-than-Fed update
06/14/00: The judicial hacker
05/16/00: Front-View Windshield
05/09/00: Don't Overreact
05/05/00: Give it Back
05/01/00: Wealth and Capital
04/18/00: Growth, Freedom and the New Investor Class--Stay the course
04/13/00: Correct Value
03/28/00: Governments roil the Markets
03/28/00: Fed should keep its powder dry
03/14/00: Reduce Debt, Derail Economy
02/17/00: Unsettled
02/10/00: Bush's Footprints
01/25/00: To preserve its standing as the world's number one economic power
01/06/00: It's not the '70s
12/28/99: They missed it
12/23/99: Bonditos
12/20/99: Dracula's Curve
12/16/99: When Alan Greenspan sneezes, Wall Street economists catch cold
12/10/99: Y2K-Related Cash
11/23/99: Y2K Money: Inflationary or Not?
11/16/99: Investor Retaliation
11/05/99: Rosy Lives
10/29/99: Drain Reserves
10/22/99: Supply-Side Is Mainstream
10/14/99: Y2K will likely bring more prosperity
10/07/99: Clinton's tax-cut veto
10/01/99: What's really bugging the stock market?
09/23/99: Growth Trade
09/09/99: Bad Dollar Logic
09/09/99: Buttered bread
08/31/99: Bull Market Alive and Well
08/26/99: Let Prices Rule
08/19/99: Blame OPEC, Not Growth


©1999, Lawrence Kudlow