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Larry Kudlow: A Super Tax Hike Would Spell Disaster
It would be a great tragedy if a super tax hike came out of a super committee compromise deal. It would do great harm to the economy — just as much harm as President Barack Obama’s various tax-hike threats. And on the Republican side, a super tax hike would irreparably split the GOP.
OK. Here’s the good news. In a CNBC interview this week, I asked super committee co-chair Jeb Hensarling about an idea from the Democrats to raise taxes by $600 billion to $800 billion. About $300 billion of that might be upfront, with $500 billion later from some tax-reform overhaul. This would be an unmitigated economic disaster.
But Hensarling was blunt: “Not going to happen, Larry.” He said no such deal has been presented to him. And if it were, he and other Republicans on the super committee would not support it.
Hensarling then added, “We put $250 billion of what is known as static revenue on the table, but only if we can bring down rates. We believe we can bring the top individual rate down to 28, 29, maybe at most 30 percent, and bring the corporate rate down to the median of the EU, 25 percent.” For emphasis, he said, “We have gone as far as we feel we can go.”
The Texan was referring to the Sen. Pat Toomey plan, which would lower the personal tax rate to 28 percent and head down from there, while at the same time put limits on personal deductions (such as mortgage interest) for upper-income taxpayers. In other words, flatten the rates and broaden the base.
Net revenues would go up in this scheme for two reasons: First, the reduction in personal tax breaks; second, the economic-growth impact would be positive. This calls on the research of Harvard professor Martin Feldstein, who urged Congress to trade off lower rates with fewer deductions since the incentive effect of taking home more after-tax income would benefit the economy.
Trouble is, Democrats don’t buy into it — at least not yet. Senate super committee members Patty Murray and John Kerry have opposed real tax reform. And it has been reported that House super committee member Xavier Becerra opposes it (although Chris van Hollen might be looking at it).
But the whole trouble with the machinations of the two sides in this deficit-cutting episode is that the closer you get to the Nov. 23 deadline, the more compromises are made. Democrats are pulling hard for higher tax rates, which would damage the economy, while Republicans are making no progress getting any meaningful health-care entitlement reform.
And the GOP is in danger of losing the narrative. Most of the noise is coming from Democratic proposals for higher taxes, while Republicans have not taken any entitlement-spending-cut scalps.
In all likelihood, Hensarling will succeed in his conference with the idea of making the George W. Bush tax rates permanent in return for about $300 billion of loophole-closers. The deeper-tax-rate-cut Toomey reform doesn’t seem to be gaining traction.
Trouble is, so-called tax reform would probably be handed over to the tax-writing committees in the Senate and House for a decision next year. At deal-time this year — if there is a deal — we won’t know what the tax-rate picture will actually look like. At least, that’s a risk. But it’s possible in a worst-case scenario that personal-deduction limits will be hammered out upfront, without any assurances of lower tax rates next year.
All this leads me back to this question: Where are the super spending cuts? Nowhere. So why not fall back on the across-the-board, budget-cutting trigger known as sequestration? That’s the $1.2 trillion backup plan if a $1.5 trillion deal cannot be reached. (Hensarling called the $1.2 trillion backstop very important.)
Then at least some spending will be cut. And the trigger is probably better than a deal that uses Iraq and Afghanistan spending cuts that would happen anyway or fiddles around with the current-services baseline from which reductions are measured.
For defense hawks who object — since 50 percent of the trigger would come out of national security — any spending measures would have a shelf life of only one year: 2013. After that, new presidents and Congresses will do what they will.
In another interview, Rep. Ron Paul (now in a dead heat for first place in Iowa polling) told me the GOP should forget tax hikes and trigger $1.2 trillion in spending cuts. Out on the campaign trail, Newt Gingrich agrees.
But for investors and people in business, a super tax hike would be the worst possible outcome. So take the spending-cut sequestration now, and then fight the real battle in November 2012. That’s better than a super committee deal at any cost.
— Larry Kudlow National Review Online’s economics editor, is host of CNBC’s The Kudlow Report and author of the daily web blog Kudlow’s Money Politic$. Click here for more information, or click here to contact him.
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» on 11.18.11 @ 03:04 PM
So true Larry, unless you believe in the tooth fairy or that just moving wealth around actually makes more.
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» on 11.18.11 @ 03:25 PM
Mr. Kudlow is a bright gentleman with a lively sense of humor.
The “tax increase” he refers to is simply not renewing the catastrophic Bush Tax Cut from a decade ago.
Which means, letting the tax rate go back to where it was before Bush’s people
drove the economy into the ground, and sent the Deficit to record levels.
Bush (and Kudlow) promised a “generation of prosperity” resulting from their tax
cut. That generation lasted only 2.5 years, before the wheels came off the wagon.
Now, Kudlow wants to retain the tax cut because “the economy is so weak”. Ha.
It was Kudlow and this ridiculous tax cut which caused the weakness.
It was this “tax cut for the rich” which also dramatically accelerated the giant
gap between the nation’s upper “1 percent” of super-wealthy, and the decline
of the middle class.
Phooey! If Tea Party-ers really want to “reduce the Deficit”, let this failed tax
cut expire, and then count it as “new revenue” which can match with more cuts
to help plug the hole.
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» on 11.18.11 @ 06:06 PM
Yeah Publius, 4% to 5% unemployment rate drove the economy into the ground. When are you libs going ever going to admit what drove this economy into the ground was the government getting involved forcing banks to make loans that should never have been made. More revenue was created than the Clinton admin. The problem with Bush, besides his liberal spending was, not to have the cojones to actually stop the Fannie Mae and Freddie Mac debacle. Every time he tried, every news media castigated him and McCain as mean old Republicans that just didn’t want poor people to own homes. Just get the government to stop social engineering.
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» on 11.20.11 @ 10:06 AM
Guys we have been heading into this ditch for two generations now. Ever since some smart a**ed Harvard economists convinced our government that Keynes was brilliant and that we didn’t need to earn anything as long as we kept currency in circulation. Well that worked out real well didn’t it?
Look we ran out of oil and hawked our manufacturing and gamblers and speculators convinced us that paper had substance. Now we are $70 trillion in debt privately and publically and we don’t have the wealth generating manufacturing left to earn our way out. It’s that simple. It wasn’t Bush or Obama neither one has a clue. It wasn’t Clinton, Reagan or Carter. We love so much to point fingers and assign blame. But the real culprit stares back at us in the mirror every morning. We allowed it to happen. We decided to be gamblers and speculators. We decided that a career didn’t have to have anything to do with building wealth, just accumulating it. We decided to elect panderers and do nothings that looked out for our shallow goals while the timbers holding up the floor were allowed to rot.
The stupid super committee is in dead lock. Of course it is! Until this country, all of us, wake and realize how we got here, now, and how we were built then we will solve nothing and go down as every other empire has, doomed to repeat history because they never thought its lessons applied to them.
But it isn’t too late. We can turn it around. But more Americans need to be factory workers, builders, industrialists and less of us need to be bankers, lawyers, doctors, waiters, government staffers, realtors, movie stars, sports stars, middlemen, investors, writers, teachers, firefighters, cops, judges, clerks, secretaries, accountants, janitors, gardeners, etc.. etc.. etc.. There is nothing wrong with any of the nonproductive careers I mentioned here and that is just a small list. My career has always been in that category. But if we don’t prop up, bolster, value and prioritize those careers that actually make more wealth than they consume, then no matter how good you are at what you do we will all go broke, just like we are now.
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