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Moderates Thwart GOP on Taxes

Please don’t take tax advice from New York Times columnist Paul Krugman, the New York Times editorial page or those on the left who tell you we can get more revenue by raising tax rates on capital gains and dividends. We can’t, and if we try, we will do incalculable harm to the economy and ultimately drive the deficit through the roof and the economy into a slump.

The Times recently editorialized that it is "lunacy" and "ludicrous" for Congress to act this year to prevent tax rates on capital gains and dividends from rising automatically in 2008 as they are slated to under current law, when "we aren’t even in a recession." Would the Times prefer Congress tell investors tax rates on capital formation will go up to 35 percent on dividends and by 33 percent on capital gains in two years? That would guarantee a cut in investment, which is the real lunacy and really ludicrous.

The Times’ excuse for raising tax rates on investment returns, and one picked up on by "moderate" Republicans such as Sen. Olympia Snowe of Maine, is that we can’t afford to cut tax rates with the deficit so large. But in the fiscal year just ended in September, the deficit was less than 3 percent of GDP – $319 billion – a trivial amount in a $12.5 trillion economy that is poised to produce close to $140 trillion of GDP over the next 10 years, more if we do the right things.

Because the 2003 reduction in tax rates on capital gains and dividends was so successful in spurring investment, the economy continues to outperform expectations. As a result, last year’s deficit actually came in $100 billion smaller than projected at the beginning of the year. There is no deficit problem unless there is a recession. And raising tax rates on investment and capital formation is a good way to slow down our economy and lose revenue.

President Bush didn’t cut taxes, he cut tax rates; revenues are not down but up, and new jobs are the direct result of capital investment.

Liberals and moderate Republicans love workers but hate the formation of capital that allows businesses to create the jobs that employ workers. Liberals love unionized manufacturing jobs that raise factory workers into the middle class, but they hate the capital that buys the machines that make those high-value jobs possible. Liberals decry conspicuous consumption but excoriate anyone with substantial income to save and invest. Liberals lament our low saving rate but seek to redistribute every available surplus dollar of disposable income in the name of fairness.

To appreciate just how ludicrous the deficit argument is that supports raising tax rates on capital gains and dividends, consider the fact that even the official static estimate of the congressional Joint Committee on Taxation puts the cost of not raising the tax rates at a minuscule $21 billion. It’s unconvincing when moderate Republicans say, "We’re now in a very different world than even just a few months ago when we voted on the budget" and made provision to prevent tax rates on capital gains and dividends from rising in 2008.

As USA Today reports, the robust economic growth spurred and perpetuated by the reduction of tax rates on investment enacted in 2003 continues apace. Output in the manufacturing and core retail sales sectors is accelerating. The economy now looks much stronger than it did before Hurricane Katrina hit. While the housing market may cool somewhat, the long-ballyhooed housing crunch doesn’t appear likely unless the Fed just mindlessly keeps raising rates. Investment remains solid and business sales to kick off the Christmas season look strong. The economy is so strong that state revenues are rising at a rapid 7.2 percent rate, and many states with budget surpluses are planning to cut tax rates.

Thankfully, Senate Majority Leader Bill Frist, R-Tenn., and Sen. Jon Kyl, R-Ariz., understand what’s at stake and are leading the effort to stop an automatic tax increase from occurring in 2008. Even though Snowe forced the Senate to pass a tax bill without the capital gains and dividends provision preventing a tax rate increase, Frist and Kyl are committed to restoring the provision stopping the tax hike in conference. Frist has drawn a line in the sand, saying he will not bring a conference committee report back to the Senate floor without the capital gains and dividends provision.

Raising tax rates will be clearly self-defeating in holding the deficit in check because it would damage the economy, destroy jobs and shutter businesses, which will reduce revenue. So what about the moderates’ argument that we shouldn’t be cutting taxes on the rich to cut welfare benefits for the poor? As I’ve written before, if you want to soak the rich, cut their tax rates. And if you want to control the growth of government, the only way to succeed is to overhaul the big three entitlement programs that are the drivers of projected budget deficits – Medicare, Medicaid and Social Security. Cutting benefits for the poor is not the way to do it.

Written By

Mr. Kemp is founder and chairman of Kemp Partners, which has done work on behalf of corporate defendants in asbestos litigation reform. Kemp is honorary co-chairman of the Free Enterprise Fund.

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