Obama's Lowball Vision: Tax Success and Growth

By Lawrence Kudlow (Archive) · Saturday, January 28, 2012

You would think that with one of the weakest economic recoveries on record, President Barack Obama would be searching desperately for ways to promote economic growth. It is, after all, an election year. Most pundits and pollsters agree that it's the economy, stupid.

But instead, Obama used his State of the Union speech to rail on about fairness, inequality and redistribution. The Obama strategy is simple: Tax the rich, because they don't pay enough.

The problem is that they do pay enough. According to the Tax Foundation, Americans making $1 million or more pay a 25 percent average tax rate. People in the $50,000 to $100,000 income category -- call it the middle class -- pay 7 to 8 percent.

But no, Obama's one big idea in his Tuesday night speech was a 30 percent minimum tax on millionaires. This, by the way, is really a hike in the capital gains tax. And this Obama penalty is aimed squarely at his likely election opponent, Mitt Romney. Talk about taxing success. Talk about taxing growth.

The capital gains tax is the single most important economywide tax on wealth, risk taking and investment. It's a tax on seed corn. What a brilliant idea, Mr. President.

I remember the late Jack Kemp always saying you can't have successful capitalism without capital. But that wasn't in the president's State of the Union.

It's not as though the economy is prepared to take another tax hit. The fourth-quarter gross domestic product report adjusted for inflation came in at a mediocre 2.8 percent. Wall Street promptly sold off on the news.

And we're now 10 quarters into the tepid Obama recovery, with its average quarterly growth rate of 2.4 percent annually.

Deep recessions are supposed to breed strong snap-back recoveries. But it's not happening -- even after an $800 billion government spending package, a $2 trillion Federal Reserve balance sheet expansion, a zero Fed interest rate (for three years and counting) and a whole bunch of temporary targeted tax cuts.

It's the whole Keynesian bag of tricks, but it's still a very sub-par recovery.

Way back when, Ronald Reagan used the supply-side model and rejected big-government Keynesianism. He permanently lowered marginal tax rates, deregulated the economy, went to a strong King Dollar that collapsed oil and gold prices, and limited domestic spending (as a share of GDP). After 10 quarters of recovery, the Reagan growth rate was 6 percent.

Compare that with Obama's 2.4 percent. Or compare Obama's 2.4 percent with the 4.6 percent post-World War II average recovery rate after 10 quarters. The average is twice as good as Obama's. But Obama is only roughly a third of Reagan. That tells you something.

On top of all this, under current-law Obama policy, the vitally important capital gains tax is going up, even without the millionaire's minimum. Next year, the capital gains tax will revert to 20 percent from today's 15 percent. Then Obamacare will raise investment tax rates by 4 percent, bringing us up to 24 percent. That equals an 11 percent rollback of wealth and growth incentives.

But that's not all, because the capital gains tax is paid on top of the 35 percent corporate tax. So under Obama, a 24 percent cap gains tax is really a 51 percent tax rate on capital.

As Romney found out, even today's 15 percent cap gains tax is really a 45 percent double tax on top of the corporate levy. But there's a better way here: Slash the corporate tax rate, and leave the cap gains rate alone until full-fledged tax reform can take place.

In other words, increase incentives to grow and invest. Make it pay more after tax to invest and take risks. That's a growth prescription, the exact opposite of Obama's redistributionism.

Why is it fair or equal to create a lower tide that pulls down all boats?

I interviewed Romney on CNBC this week, and it's clear that he gets this. And as he aggressively argued in the Jacksonville, Fla., debate, he is proud of his success and doesn't want to give it back to the tax man.

More importantly, Team Romney is cooking up a stronger tax-reform plan. Romney intends to broaden the base by getting rid of deductions, exemptions and loopholes and then bring down the rates. I asked him whether the plan would be ready during the primary season. He said yes.

There is a growing consensus across the country for full-fledged reform of the personal and corporate tax codes. People yearn for simplicity, competitiveness and new incentives. Obama's great mistake in the State of the Union was his lowball vision of class warfare and redistribution when the country wants growth measures.

This November, we'll see a great debate between a big-government entitlement society that emphasizes fairness and a smaller-government growth society based on free market capitalism. Pro-growth tax reform is essential to this debate.

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