Last Updated:November 22 @ 04:51 pm

Kudlow: Extend the Bush Tax Cuts Now

By Lawrence Kudlow

House Speaker John Boehner is playing a heroic role right now. In his efforts to prevent the Bush tax cuts from expiring, Boehner is aggressively taking on President Obama's leadership ineptitude on the economy.

In essence, Boehner is pushing a Republican policy to wrap up a debt-limitation bill  and  extend the Bush tax cuts in one fell swoop  before  the election -- and before all the last-minute, crisis-oriented political machinations that would come in a lame-duck Congress, threatening another credit downgrade and leading to a business-hiring freeze and plunging stock market, all of which happened last year.

Tax-cut certainty is so vital right now because the anemic economic recovery may be moving toward  deflation.  That's the message of a gold price that has collapsed by near 20 percent, falling from around $1,900 an ounce to the mid-$1,500s. With a risk-averse economy at home, and with the Greek and European financial crises abroad, the demand for dollars seems to exceed the dollar supply printed by the Fed. This could be solved by more quantitative easing. But a better approach for a system already oversupplied with unused liquidity would be the extension of tax-rate growth incentives, not more monetary pump-priming.

The uncertainty over the Bush tax cuts already has caused a number of business leaders to threaten a hiring freeze and a dampening of investment until they can figure out the after-tax cost of capital and rate of return on investment. Hiring has slowed noticeably in recent months. And a number of Wall Street economists are marking down the anemic recovery even more, suggesting that the 3 percent growth at the end of last year, which faltered to 2 percent growth in the first quarter, could be even less in the period ahead.

A bunch of CEOs have even formed their own march on Washington. Eighteen of them just wrote to Treasury man Timothy Geithner, begging him to oppose tax-rate hikes on dividends (from 15 to 45 percent) and capital gains (from 15 to near 30 percent, taking the "Buffet Rule" into account). "Equity capital is the life blood of investment and job creation for U.S. companies," they wrote. And they argued that the administration's tax-hike plans would do great harm to American competitiveness and capital formation.

According to accounting firm Ernst & Young, the top U.S. integrated tax rate on corporate profits and dividends is on course to hit 68.6 percent, significantly higher than all other Organization for Economic Cooperation and Development countries, as well as Brazil, Russia, India and China. Capital gains would rise to 56.7 percent.

And Boehner knows this. So he's begun a valiant fight to get supply-side tax reform at the top of the congressional agenda well before the election. Similarly, House budget chair Paul Ryan is suggesting at least a six-month extension of the Bush tax cuts, so as not to disrupt business. (By the way, the Ryan tax-and-spending-reform budget got 41 votes in the Senate, while Obama's budget got none.)

In a recent interview, former top Obama economic advisor Larry Summers told me the U.S. recovery is going "ahead of schedule." Really? But former Obama economist Austan Goolsbee gives a more realistic assessment by referring to a subpar 2 percent forecast that is way too slow to spark faster job creation.

Bizarrely, some 25 million people have vanished from the labor force -- from unemployment, underemployment or simply dropping out all together. And  half  of U.S. households are now on some form of federal-transfer-payment assistance. So as we pay so many people not to work, we're sapping the vitality of the economy.

Mitt Romney recently gave a fine speech blasting Obama's profligate spend-and-borrow policies. He described "a prairie fire of debt sweeping across Iowa and the nation," and he tied our newfound debt to the "tepid recovery."

But lower spending  alone,  while important, is not going to solve the economic-growth problem. Yes, moving spending to 20 percent of gross domestic product from 24 percent will free up private resources. But lower tax-rate incentives on the extra dollar earned and invested is a more powerful economic-growth tool. Romney should push his 20 percent tax-rate-reduction plan. That would add liquidity to fight deflation and would provide new economic-growth incentives.

As for John Boehner's goal of an early extension of the Bush tax cuts, it's going to be an uphill climb. Democrats want to raise taxes, not cut them. But at least the GOP will have a coherent growth-and-jobs message. They can tell the public how important it is to avoid falling off the massive tax cliff that looms ahead. Deflationary fears can ease. And they can make it plain to voters that the GOP has a growth message in these perilous economic times, while the Obama Democrats do not.

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2 Comments

  1. BillzillaComment by Billzilla
    May 18, 2012 @ 10:16 am

    The unemployment numbers are as phony as the current “Occupier” of the White House!

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  2. inluminatuoComment by inluminatuo
    May 18, 2012 @ 10:27 am

    Despite what the Progressive Democrat panderers of division would tell you, the Bush tax cuts were very good also to the middle class who will also see their taxes shoot up when this expires, just at a time when Obamacare costs begin to balloon. Once again the Liberals have led us into the trap of votes for immediate gratification whose pain later is postponed and enhanced when the final bill comes due. Let’s watch them penalize Americans to the tune of $2000-$2500 for not buying health insurance after destroying the very vehicle of a job which was suppose to fund the tax, like they are destroying the very business vehicle that used to fund our government, i.e. private business.

    Businesses for lack of any clarification from Congress have already engaged in hiring freezes and are sitting on mountains of unnecessary unemployment with mountains of idle unused Private Capital investment funds that should have been put to work months ago getting us out of this Democrat prolonged recession. Sane cautious businessmen have sat on the sidelines out of economic Obamaphobia that only offers displayed Obama economic incompetency.

    When your Democrat Liberal President’s budget does not even get one vote in the Senate, even from a member of your own party it is time for people of BOTH parties to start scratching their heads and asking themselves if they have an economic death wish or are just plain stupid for ever voting this guy into office.

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