Why Tax Reform is So Important for the Economy
FORECASTS & TRENDS E-LETTER
1. Big Economic Ideas from Arthur Laffer & Steve Forbes
2. Why a Tax Cut Victory by Labor Day is Still Possible
Today I have reprinted two of the most interesting articles I have read in the last couple of weeks. The first is an article written by CNBC’s Larry Kudlow, one of my favorite writers – in which he interviews Steve Forbes and Arthur Laffer, father of the Laffer Curve. They refute the mainstream media notion that tax cuts now won’t stimulate the economy in today’s day and age – as they did for nearly two decades after President Reagan lowered taxes in the 1980s. They make some excellent points.
The second article was tag-teamed by Kudlow, Forbes, Laffer and economist Stephen Moore. This piece emphasizes why it is still possible to get meaningful tax cuts by Labor Day – IF President Trump is prepared to really push it.
I initially planned to summarize them for you today, but decided they read best just the way they were written. You should read both for a perspective you won’t see in the mainstream media. The bold emphasis in both articles is mine.
Finally, keep in mind that we get our first look at 2Q Gross Domestic Product on Friday morning at 8:30 ET. The pre-report consensus is for an initial reading of 2.7% annual rate in the 2Q, up from 1.4% in the 1Q. I will have my analysis for you next Tuesday.
Big Economic Ideas from Arthur Laffer & Steve Forbes
I participated in perhaps a bit of radio history last week when Steve Forbes and Arthur Laffer joined me on my syndicated radio show. It may have been the first time these [two] supply-side-economics giants were ever together over the airwaves.
Forbes, of course, is chairman of Forbes Media and twice ran brilliant issue-campaigns for president. And Laffer, once a key advisor to President Reagan, is father to the ground-breaking Laffer Curve, for which he should have won a Nobel Prize. In our discussion together, they didn’t disappoint.
We started with “one big idea.” That’s how the late Jack Kemp approached economic-policy reform back in the 1980s. And his big idea, embraced by Reagan, was a mix of low marginal tax rates to spur economic-growth incentives and a sound, reliable dollar to conquer inflation and create confidence…
But these days, if you adhere to that big idea, you’re ridiculed as clinging to the past. My guests would have none of it.
“We need it now more than ever,” said Forbes. “To say that just because it worked 40 years ago, therefore, it’s old, is like saying the Declaration of Independence and the Constitution are old, therefore we can cast them aside.” Forbes’s version of “one big idea” is a flat tax and a sound dollar linked to gold. If we have that, we’ll be the “land of opportunity again,” he says.
Laffer [pictured at left] agreed. “Our economic verities have remained forever,” he said. “They go back to caveman, pre-cavemen. Incentives matter: If you reward an activity [lower taxes], then people do more of it. If you punish an activity [raise taxes], people do less of it.”
But for the tax side of “one big idea,” Laffer would like to see corporate tax reform. I agree. Reagan used to say, “Give me half a loaf now, and I’ll get the other half later.” Well, I’d take the half loaf of corporate tax cuts right now [by cutting the corporate income tax from 35% to 15%].
And that would work for Forbes, who can see [individual] income-tax reform following corporate-tax reform. “Even if we get to this two years down the road,” he said, “I think [Trump would] be amenable to doing something radical like a flat tax.”
But why is it that our Democratic friends in the economics profession and politics work so hard to discredit the idea of lowering marginal tax rates on the extra dollar earned to spark the positive incentives that lead to prosperity? “Let me put it just succinctly,” answered Laffer.
“These people are willing to rebut arguments they know to be true in order to curry favors with their political benefactors.”
To which Forbes added: “A lot of these far-left ideologues would rather have a smaller economy and more government power than a bigger economy and a smaller government.”
From that sad truth we moved to prosperity killers, in particular trade protectionism, about which there is still much talk within the Trump camp. Where, I asked, does trade protectionism — including tariffs on China — fit into the low-tax-rate, strong-dollar prosperity model?
…“It doesn’t,” said Forbes, who offered an alternative: “The smart approach is get this economy moving through… tax cuts and deregulation. And then having a stable dollar … you sit down country by country and remove trade barriers.”
Anything but the trade protectionism that blew up the stock market in 1929. To which Laffer added the great line: “Don’t just stand there, undo something!” “Cut taxes, stabilize the dollar, reduce tariffs, reduce regulation,” he said. “Undo, undo, undo — and undo the damages these other guys have done.”
One of those damages is Obamacare. And the fear now is that it will never get undone. But my guests were optimistic, if philosophical. How will we get true, free-market, health-care reform? “You do this ... sometimes with great leaps, but sometimes step by step,” said Forbes. To which Laffer added: “With any type of change that we can make in the right direction … never let the best be the enemy of the good.”
Finally, I asked, “Is the free-market model losing ground?” We’ve seen its decline in Europe, Latin America, and elsewhere. “This thing always ebbs and flows,” said Laffer. “Reagan, at first, was dissed by all the foreign leaders, except for Thatcher. And once our success story came in, he’s now virtually a god. That’s going to happen again, believe me.”
The limits of this space have forced me to drastically abbreviate what I do believe was a historic radio event. Two economic giants met and discussed the big ideas that will restore growth and prosperity. They offered the “how,” and were confident that the “when” is near. END QUOTE
Larry Kudlow is CNBC’s senior contributor. His new book is JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.
Why a Tax Cut Victory by Labor Day is Still Possible
by Kudlow, Laffer, Forbes & Stephen Moore
Trump and Republican leaders in Congress must act with much more urgency and decisiveness on tax cuts.
In recent weeks the tax cut agenda seems stalled out and the delays and indecision are negatively affecting growth and the stock market. We hear that a tax plan from the White House may not come until the fall and may not even pass Congress until 2018 – if at all.
Is it any wonder that investors are getting jittery? The stock market had priced in much of the anticipated benefits to business, wages and profits, which accounts in no small part for the $3 trillion rise in equity values and the surge in business and consumer confidence after the election.
Now the confidence is waning. Without a tax cut passage in 2017, the odds of Republicans losing the House and Senate in November 2018 are heightened. The economy needs time to respond to the growth hormones from the Trump tax plan. A prosperous economy in 2018 is by far the best way for the GOP to build on its historic victory in 2016.
We reject the idea that a simple, clear, growth-oriented tax cut can't happen this summer. Barack Obama passed an $830 billion so-called "stimulus bill" within weeks of his new presidency in 2009. Ronald Reagan signed into law at his ranch in Santa Barbara, Calif. his historic tax cut — then the largest in history — by August of his first year in office.
The only reason Republicans haven't made this happen is that the tax cut has not been a priority.
To jump-start the tax debate, we are suggesting a Three Easy Pieces initiative:
This plan over 10 years would deliver a $3 trillion tax cut to workers and businesses, and the boost in growth in jobs and output will produce higher-than-predicted increases in federal, state and local tax receipts.
A 3%-plus growth rate over the next decade will yield more than $3 trillion in lower deficits at the federal level and almost $1 trillion more in revenues for the states and cities.
We estimate that the business tax cut and full expensing would expand business investment and inflows back into the United States by potentially trillions of dollars in 2018. Instead of jobs, businesses and factories fleeing these shores, the U.S. would become an overnight magnet for capital and jobs. America would be the tax haven.
What does this mean for the middle class? First, the Congressional Budget Office estimates that about two-thirds of the benefits of the corporate tax cut would go to workers in more jobs and wages as businesses reinvest at a faster pace. Faster growth and higher wages would put after-tax revenue in the pockets of average families. Welfare would fall and prosperity would be the new mindset.
The increase in the standard deduction would save many middle-class families about $1,500 to $2,000 a year on their taxes and simplify taxes by reducing the need for middle-class families to itemize their deductions [Kudlow & Company argued].
This "keep it simple" tax plan would scrap three widely believed misconceptions on the way forward on tax policy. The first misconception is that a tax plan should be paid for with offsetting tax increases. No. Revenue neutrality is an inside-the-Beltway trap and will prevent passage of a strong tax cut.
We fully recognize that because of arcane budget rules, rejecting revenue neutrality means that the tax cut will not be permanent. But nothing is permanent in Washington. With 51 votes, the Senate can pass a "temporary" tax cut for that lasts for 10 or 15 years without a single Democrat vote.
We would much prefer a powerful tax cut that is "temporary" over a revenue-neutral tax plan that is economically impotent.
The second misconception is that a border-adjustable tax is necessary [it is not!]. Incredibly, the House leaders still have not given up on this wildly unpopular and ill-designed sales tax. This obsession with the border tax is beginning to look like the Pickett's Charge [unsuccessful battle] of tax reform.
Third, is that passing a tax cut now will kill the move for tax simplification and broader reform with lower tax rates and elimination of special interest tax breaks. No. Winning creates its own momentum. A populist campaign to rip up the incomprehensible 60,000-page tax code should be the GOP crusade for 2018 and 2019 – and we will be right behind President Trump in that fight.
Finally, Trump will have to fight for this tax cut, not just to take on the liberal class-warfare warriors, but also to get the knee-knockers in his own party off the dime. He should hold a nationally televised address from the Oval Office in the weeks ahead making the case to the American people that a tax cut is vitally important to the economic health, jobs and the vitality of the nation.
This is what Reagan did to push foot-dragging House and Senate members forward on passage of his tax plan in 1981. That changed the course of the American economy for nearly two decades, and Donald Trump can accomplish the same economic resurgence if he acts decisively — and with all due speed. END QUOTE
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** Recorded versions of the two webinars with Measured Risk Portfolios earlier this month are now available for you to watch on our website. One webinar is for their “MRP” strategy which uses options, and the other is about their “CLIP” strategy which invests in income-producing stocks. These are two very different investment strategies you should consider.
Hoping it’s cooler where you are,
Gary D. Halbert
ProFutures, Inc © 2018