Saturday, September 17, 2016


Tax Cuts, King Dollar & GrowthFifty-four years ago, at the Economic Club of New York, President John F. Kennedy unveiled a dramatic tax-cut plan to revive the long-stagnant U.S. economy. He proposed lowering marginal tax rates for all taxpayers and reducing the corporate tax. He advised lowering the top tax rate from 91 to 65 percent and closing tax loopholes. Five times during the speech he used the word “incentives.”

In perhaps the most famous line from that path-breaking speech, he said: “In short, it is a paradoxical truth that tax rates are too high today and tax revenues too low, and the soundest way to raise revenues in the long run is to cut rates now.”

Kennedy had already in 1962 lowered investment taxes on business. And after his tragic assassination, his broader tax proposals were passed into law in early 1964. And they worked. The U.S. economy grew by roughly 5 percent yearly for nearly eight years.

Almost 20 years later, Ronald Reagan launched a 30 percent tax-rate reduction to save the economy from the high-unemployment, high-inflation 1970s. Reagan acknowledged many times that he was following in Kennedy’s footsteps. Under the Gipper, tax rates were slashed from 70 percent to 28 percent, corporate taxes were cut, and numerous loopholes were closed.

And the American economy grew mostly between 4 and 5 percent annually for over 25 years.

By the way, both men, Kennedy and Reagan, followed a simple growth model of what I call tax cuts and King Dollar. Both men also reached across the aisle to garner bipartisan support for their plans.

This past week, Donald Trump went a long way toward joining their ranks. Speaking before the Economic Club of New York, he delivered a positive, optimistic growth message that falls squarely inside the JFK-Reagan model.

“My economic plan,” he said, “rejects the cynicism that our labor force will keep declining, that our jobs will keep leaving, and that our economy will never grow as it did once before.” Optimism.

He established a goal of 4 percent economic growth, which would double the stagnant rate of the past 15 years. The centerpiece of his plan is a reduction in business tax rates for large and small firms to 15 percent from the current uncompetitive 35 to 40 percent. He offered immediate expensing for new investment and a 10 percent repatriation rate to incentivize American firms overseas to bring $2.5 trillion home.

High business taxes are the biggest obstacle to a return to rapid economic growth. Abundant research has shown that the best way to raise wages and create jobs is to slash business taxes. Within five years a business tax cut will pay for itself, and then some.

Importantly, Trump plans to reduce individual tax rates with three new brackets of 12, 25, and 33 percent. He would cap deductions for the wealthy and close special-interest loopholes. Middle-income wage earners will be the biggest beneficiaries of these reforms.

To cap it off, he will roll back out-of-control regulations, unleash American energy, and abolish the Obamacare failure.  Following the successes of the JFK and Reagan tax reforms, Trump’s strategy is likely to generate 4 to 5 percent growth over time. A rising tide will lift all boats.

The contrast between the presidential contenders could not be starker. Hillary Clinton would raise taxes on so-called rich people, corporations, capital gains, financial transactions, and inheritance. Has there ever been an example where America has taxed its way into prosperity? Never.

Trump has an economic-recovery-and-prosperity plan. Clinton has an austerity-recession plan. Historically, in presidential elections, the optimistic growth plan nearly always wins.

That said, Trump’s view of monetary policy, especially the dollar, needs to be resolved. At the Economic Club of New York, he charged that the Fed is being “totally controlled politically.” 
 
Elsewhere he has stated that Fed chair Janet Yellen is keeping interest rates ultra-low in a political effort to boost Democratic fortunes. I disagree. 

Yellen doesn’t control the Fed monolithically. And the real debate about interest rates is going on inside the Fed.

True enough, the Fed needs radical reforms. In particular, it needs to replace its failed forecasting models and be rid of the academics who overwhelm the Fed system. But as New York Sun editor Seth Lipsky has taught us, the best way to depoliticize the Fed is to develop a standard of value to make the dollar strong, reliable, and stable. In other words, a monetary rule.

JFK and Reagan’s growth model included tax cuts and a steady dollar. Trump has taken a gigantic step toward restoring prosperity with his tax-cut centered fiscal policy. Hopefully he will soon turn to a sound-dollar policy to bolster the growth impact of lower tax rates and regulations.

And hopefully then he will pound away on all this on the campaign trail. 

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