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Jewish World Review Sept. 19, 2000/ 18 Elul 5760

Lawrence Kudlow

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Consumer Reports

Euroland Tax Revolt is Good for the Europe -- WHEN then-U.S. Ambassador to France, Thomas Jefferson, got wind of Shay's rebellion in Western Massachusetts over the imposition of a federal whiskey tax, the future president turned to his private secretary, William Short, and said "I like a little rebellion now and then. It's like an electric storm in the atmosphere."

Jefferson was also advising Lafayette and others during the French Revolution, which he approved of. He believed that a bit of violence was a small price to pay for freedom. All this and much else can be found in Max Byrd's historical novel Jefferson, which invents a few narrative characters, but relies on historical facts. It's a good read, though not as good as his most recent Grant published a few months ago.

Jefferson's spirit of "a little rebellion now and then" is alive and well in today's Europe, where high energy prices are adding fuel to an overall tax rebellion that has been gathering force for quite some time.

Recent OPEC price hikes have caused a revolt among Euroland truckers, farmers, motorists, fisherman, consumers and businesses. Even worse than the OPEC price hike, recent increases in gas taxes and VAT fuel taxes have caused major irritation on the continent. Seventy-percent of Euro gas prices are tax-induced compared to 25% in the U.S. (which is also too high).

So ordinary working folks have been boycotting fuel depots and blocking highways to make their growing irritation known. Even with the inconvenience, Thomas Jefferson would have loved it.

Tony Blair and some others are playing macho man by putting law and order ahead of economics, but that misses the point. These are ordinary working men and women who themselves believe in an orderly middle class life, but they are fed up with high taxes.

There is a silver lining in all of this. Across-the-board tax-cut plans now on the table in Germany, France, Holland, Italy and Belgium will garner even greater political support as a result of the fuel tax revolt. Thanks to OPEC, which has put the high gas price icing on the tax-cut cake, the wave of Euroland tax relief appears to be unstoppable.

And this tax-cutting cycle will surely boost the value of the beleaguered Euro currency. The investment world is far too bearish on the Euro and the government world is barking up the wrong tree when central bank officials argue for tighter money.

The Euro needs tax cuts, not tighter money. There may be a wee bit of excess liquidity floating around Euroland, but growth-inducing tax cuts will sop up this excess money.

Anyway, the inflation scare in Europe has always lacked credibility. The Euroland core consumer price index has been running only 1.3% last time I looked. Euro gold has been dropping of late. Euro bond yields have been holding steady around 5¼% or so. None of this hints at a big inflation problem.

It is true that the OPEC oil shock has a more negative short-term effect on Europe, which produces no oil of its own (outside the North Sea), whereas the U.S. produces some of its own energy -- though its capacity to generate new energy has been blocked by excessive government tax and regulatory barriers.

So part of the reason for the recent Euro drop is a by-product of the temporary oil bubble. In the U.S., high-tech driven productivity is absorbing the oil bubble with very little economic consequence -- though near-term growth will be pinched a bit from the oil shock.

Really though, inflation-adjusted dollar oil prices are at 30-year lows and real oil would have to rise to about $70 in order to replicate the inflationary recession of the late 1970s and early 1980s. This just isn't going to happen.

Europe, however, lacks America's technology-driven productivity booster. But declining tax-rates for individuals and corporations will, in fact, enhance Euro productivity and will significantly raise Euro investment returns. This is why I believe the Euro currency is actually a buy right now, along with Euro stocks.

The final piece in the tax-driven Euro rally from tax-cuts is the effective date for the tax cuts themselves. As far as I can tell, the big tax-rate reductions in Germany will not start until January 1 and then are phased in for a couple of years following that. So it doesn't make sense for people to declare income at today's higher tax-rate when tomorrow's rate will be lower.

Hence tomorrow's lower tax schedule has perversely depressed today's Euro value. But, as we move into the fourth quarter and the effective tax-cut date draws nearer, look for investment flows to move in a Euro-bound direction.

The dollar won't really be declining next year. It's the Euro that will be rising. Their strength is not our weakness. It's a win-win, positive sum outcome. In particular, U.S. multi-nationals will benefit from a stronger Euro.

The Euroland tax revolt is a bit like the California Proposition 13 scenario in 1978. Things looked pretty bleak in stagflationary America. But the people's tax revolt heralded a new long-wave prosperity. It was a vision thing. Now, Reagan's pro-growth tax-cut spirit has again become the "electric storm in the atmosphere."

Thomas Jefferson, of course, would heartily approve.

JWR contributor Lawrence Kudlow is chief economist for CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.


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09/23/99: Growth Trade
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08/31/99: Bull Market Alive and Well
08/26/99: Let Prices Rule
08/19/99: Blame OPEC, Not Growth

©1999, Lawrence Kudlow