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Time for a Choice -- Not an Echo

A Commentary By Lawrence Kudlow

Friday, January 02, 2009

Republican Senate leader Mitch McConnell is absolutely right to warn against Obama's gigantic stimulus-spending package. McConnell says it "will be the largest spending bill in the history of our country at a time when our national debt is already the largest in history." As a result, he says the bill "will require tough scrutiny and oversight."

According to McConnell, scrutiny should include this simple test: "Will the yet unwritten, reportedly trillion-dollar spending bill really create jobs and grow the economy -- or will it simply create more government spending, more bureaucrats and deeper deficits?"

The Republican leader is drawing a clear line in the sand. OK, good. But the GOP has got to do more. It must start talking about tax cuts to grow the economy. And it must get back to the supply-side by talking about lower marginal tax rates on individuals, businesses and investors.

We don't need bailout nation. Nor do we need the government picking winners and losers in a massive Keynesian new-New Deal spending extravaganza. And it's not Obama's middle-class tax cut that's going to get us out of this economic jam. At best, his vision is incomplete. But at worst, his aversion to successful earners and investors is a real obstacle to full economic recovery.

Social historian and early supply-side activist Irving Kristol taught us three decades ago that the top earners are the economic activists. They're the ones with the highest propensity to consume and invest. They're the ones who buy the yachts, which are built by blue-collar workers. And they're the ones who run the small businesses and provide the capital for the new entrepreneurial start-ups that are the lifeblood of the economy. It is they who energize free-market capitalism.

If we had an economy without rich people, we wouldn't have much of an economy. That's why lower tax rates to reward the economic activists -- the most prominent capitalists -- are so essential.

In fact, the GOP has a great opportunity to challenge Obama's Keynesian pump-priming by insisting there be a major tax-cut component in any new fiscal package. Republicans shouldn't merely push for somewhat less government spending. They have to make a bold case that tax rates matter for economic growth and job creation. They must insist that any recovery package includes this key element. Shift the debate. Say clearly that a re-energized economy cannot occur without lower marginal tax rates.

In particular, the GOP position should include lower tax rates on large and small businesses. Right now, the top federal tax rate for C-corps is 35 percent. Small businesses, which pay the individual rate, also are taxed at 35 percent. These rates should be 20 percent for both C-corps and S-corps (including LLCs).

This would make a huge difference. It would be a boon for our global competitiveness, since companies in the United States (as well as Japan) are taxed way above the rates of other advanced countries. It also would attract job-creating investment flows to the United States at a time when capital is on strike in our financial markets and economy. And while businesses collect corporate taxes, it's really consumers who pay the final cost.

Republicans also could promote a middle-class tax cut that would reduce the 28 percent and 25 percent brackets down to 15 percent. And of course, the GOP should work hard to maintain the Bush tax cuts on capital gains, dividends, inheritance and top individual rates.

Senior Obama advisor David Axelrod recently told the Sunday talk-show hosts that the Bush tax-cut package of 2003 is "something we plainly can't afford moving forward." Well, in static terms, the sum-total of the 2003 tax cuts comes to somewhere between $25 billion and $40 billion. Compare that to a trillion-dollar spending plan.

In fact, lower capital-gains tax rates will raise revenues, since this is the single most sensitive tax on the Laffer curve. Indeed, many economists -- including Alan Reynolds at the Cato Institute -- argue that the growth and simplification effects of reducing the corporate tax rate would be revenue positive.

But the congressional Republicans have to step up to the plate right now. Me-too-ism on spending is a big mistake in both political and economic terms. Instead, the GOP should argue that fiscal policy needs a choice -- not an echo (to paraphrase the late conservative stalwart Barry Goldwater).

The whole debate in Washington is heavily skewed toward government spending on infrastructure. It's all spending and virtually no tax cuts. For a more balanced and effective recovery policy, the GOP has to bolster its argument for spending discipline with a loud case for tax cuts.

It truly is time for a choice, not an echo.

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