Jewish World Review Feb. 15, 2001/ 22 Shevat 5761
Lawrence Kudlow & Stephen Moore
Grow the Bush tax cut
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
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:
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.
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
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.
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
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.
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©1999, Lawrence Kudlow