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Jewish World Review Oct. 7, 1999 /27 Tishrei, 5760

Lawrence Kudlow

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Clinton's tax-cut veto -- NEARLY ALL THE ECONOMIC PUNDITS are blaming the bubble-bursting stock market correction on Fed interest rate threats and the sudden rise of the Japanese yen.

But one thing nobody is talking about is the negative stock market impact of President Clinton's tax-cut veto.

When Congress passed a broad-based pro-investor tax cut bill in late July and early August, the Dow moved from 10,600 to nearly 11,400. The stock market looked beyond the Fed's light tapping on the monetary brake and saw stronger future economic growth and profitability from the Republican tax-cut package.

Supply-siders such as Gary and Aldona Robbins estimate that inflation-indexed capital gains, estate tax elimination, expanded IRAs, an end to the alternative minimum tax, health insurance deductions and income tax-rate relief would add as much as one-half of one percentage point to the long term economic growth rate, with derivative benefits for risk-taking, capital formation, productivity and profits.

And long-term wealth creation that would be capitalized into higher share prices. But after President Clinton returned from New Zealand in early September, with the Dow above 11,000, he proceeded to totally trash the tax-cut proposal. This came on the heels of Alan Greenspan's stock market attack two weeks earlier in Jackson Hole, Wyoming. So the market headed down. It hasn't stopped yet.

Last week the market fell over 500 points, as Clinton stepped up his anti-tax cut rhetoric. Not only is the President relying on the usual liberal-left class warfare argument ("too much relief for the wealthy"), he wants to keep the money for all his pet spending programs ("it would leave too little money for important programs"). Remember, the President's budget includes roughly $150 billion in additional social spending, with a Medicare and free drug prescription entitlement plan that would sum to nearly $1 trillion over the next decade.

So the first big test in the era of surplus politics produces a government victory and a free enterprise defeat. Tax rates will not be cut, and government will expand.

The surplus revenues will not be returned to the people who earned them in the first place. Of course the stock market would react negatively to this, even if most economists and pundits and television announcers don't get it.

More fiscal follies from Washington have come in the form of the Justice Department's RICO-based lawsuit against the tobacco industry. This is a blatant abrogation of corporate private property rights. The stock market hates it. It's an attack on free- enterprise business.

It is also political retribution from the Clinton administration because their Federal tobacco tax hike was defeated. Of course they want to extract another pound of flesh from tobacco, even after the state lawsuits, in order to grab more revenues and expand spending.

Then, too, Assistant Attorney-General Joel Klein has been out bashing Microsoft as the Federal court hearings have finally come to an end. News stories report that Mr. Klein and his merry band of anti-trust anti-growth re-regulators have been traveling around the world trying to persuade foreign governments to sue Microsoft.

This sends a chill through all technology stocks. It's an attack on the technology-driven economy. More hostility to free-enterprise business.

Next year the Investor Class will vote its portfolios in favor of lower taxes, deregulation and market solutions; that is why Gov. George W. Bush is running way ahead of Al Gore and Bill Bradley. It is also why Steve Forbes' free-market flat tax-cut message has boosted him to second place in the GOP sweepstakes. But in the meantime, stock markets are registering their disapproval of the tax veto and the heavy-handed government attacks on business.

I believe the Republicans in Congress are giving up too easily on taxes. This is a tax bill where the sum of the individual parts is greater than the whole. Each part should be voted on; let Messrs. Clinton and Gore veto every pro-investor tax cut plan, if they dare.

The GOP has an opportunity to sharpen its pro-growth tax-cut message and stop the Administration's fiscal follies. The 21st century economy, dominated by Internet technologies and global financial markets, will be a very competitive place. The U.S. must not rest on its laurels.

Permanent tax-rate relief will raise saving and investment returns, and this will insure a continuous capital inflow to our shores. It will also promote a 5% long-term economic growth rate. The new century requires a new tax policy. Now is the time to start.

JWR contributor Lawrence Kudlow is chief economist for Schroder & Co. Inc and 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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08/26/99: Let Prices Rule
08/19/99: Blame OPEC, Not Growth

©1999, Lawrence Kudlow