Today's Congressional Economic Summit
Jude Wanniski
July 23, 1996

 

Memo To: Rep. Tom Campbell [R-CA]
From: Jude Wanniski
Re: Today's congressional "Economic summit"

I was delighted to hear that Newt gave you the assignment of chairing his economic summit today. Not because you have a Ph.D. in economics (which actually tends to count against you in these parts), but because you were elected to the 104th Congress in a special election and therefore do not feel any particular need to justify the events following the Contract With America. What can you do in one little old day of proceedings after all the huffing and puffing of the Congress plus the Kemp Tax Commission? My suggestion is that you work from Jack's June 18 WSJournal essay.* You can't hope to put together a comprehensive blueprint. What you can do is commit the GOP to a brand new federal tax system as the cutting edge of the congressional campaign this year. Dole has already agreed to this conceptually. But you need more than this, because Clinton and Perot can easily sign off on such a philosophical imperative. It doesn't mean anything, because it can wind up being tabled into the 22nd century, by all those who now make their living feeding off the current system. The two executive orders that Jack mentions in his op-ed involving indexation of capgains and stabilizing the dollar value of our international gold reserves are the two Archimedean ideas that could vault Dole back into contention. Where the voters may not believe any other promise Dole might make, they surely would buy a promise to sign two executive orders on the day after his inauguration! Or would he break his campaign promise that fast?

The indexing of capgains retroactively would amount to an instantaneous tax cut of 28% of $7 trillion, which is the amount of inflated gains not yet realized. It would have a wonderfully expansive effect on the economy. The stabilizing of gold in a $30 range would lower interest rates by a significant amount, taking inflation and deflation risk out of dollar assets. The $30 range idea makes it far less controversial than a pegging of the gold price, which is the goal we should set for the year 2000. Clinton will have great difficulty with either of these exec orders because his coalition is dead set against moving in that direction. If you develop these three ideas one conceptual, the other hard action ideas you will have saved the GOP Congress. If Dole can sign on, they can save him, too.

* A Bipartisan Economic Agenda By Jack F. Kemp
06/18/96
The Wall Street Journal, page A22 (Copyright 1996, Dow Jones & Company, Inc.)

A year ago, when I announced that I would not seek the Republican presidential nomination, I had hoped that the broad field of candidates in the GOP would produce a clear consensus on how the next Republican president would usher America into the 21st century. Americans had gone to the polls in 1994 and rejected special-interest politics. By electing the new Republican majority to Congress, voters sent a clear and loud signal that they wanted its leaders to stop clinging to the past and begin moving America forward again.

Unfortunately, since that landmark election, we Republicans have seemed unable to escape our old conventional wisdom. The dialogue within my party has focused on patching up a hopelessly flawed tax code, and even that discussion is hamstrung by our self-defeating preoccupation with the federal budget deficit.

It is not that deficits don't matter, they emphatically do in the same way that a high fever matters. Both are symptoms of much deeper maladies. In the case of deficits, the real malady is the anemic rate of growth in the economy and a political system that has lost the ability to set national priorities. It is not enough just to say that government is too big and that it overspends. The problem is that the economy isn't growing fast enough to accommodate the level of spending produced through the democratic process.

In a recent essay on this page ("Recipe for Growth," April 11), Felix Rohatyn suggested that the first step toward reviving robust economic growth is to forge an entente between the parties, centered on an agreement that increasing economic growth is our nation's highest and first priority. I agree. Wouldn't it be wonderful if both parties were debating how to double the rate of economic growth rather than seeing who can get the most tax credits and targeted tax cuts into the existing Internal Revenue Code?

Mr. Rohatyn offers the following suggestion to the Democratic Party: Stop using the federal tax system to redistribute income from the "haves" to the "have nots." He appeals to his fellow Democrats to shift their focus to growing the economy so that the "have nots" have more.

To Republicans, I humbly suggest that we make it possible for Democrats to give up their quest for redistribution of income and wealth by our acceptance of an appropriate role for government in financing those public goods and services necessary to secure a social safety net below which no American would be allowed to fall. Equally important, we must agree on rebuilding a ladder of hope and opportunity that all our people can climb to reach their full potential.

The huge government bureaucracy we now confront was created over the last 60 years with good intentions, but with a redistributionist philosophy that led to counterproductive results. In the face of this reality, we Republicans make a serious mistake when we try to economize first on social programs. It allows us to be characterized as putting the "cart" of fiscal austerity before the "horse" of rapid economic growth.

Yes, a number of programs need to be eliminated, many need to be restructured, and there are a multitude of things government does that it should not be doing. But determining which programs to cut or eliminate or restructure should be undertaken within the context of determining what is the proper role of government and how government should fulfill that role.

So, if I were advising the next president, I would recommend that he not ask Congress to fiddle with, adjust or patch up the current tax code. Any attempt to fix it up around the edges will only reopen old partisan wounds and invite groups with vested interests in the current system to swarm the halls of Congress. Let's not patch the current tax system, let's replace it.

It should come as no surprise that, as co-author of the Kemp-Roth tax rate reduction plan around which Ronald Reagan built his economic growth agenda, I would support proposals to cut income tax rates across the board. In my opinion, however, any tax bill the new president sends to Congress must be enacted within the first 100 days of his new administration so that the key congressional committees can clear the decks for the historic task of writing a new system from scratch. A more drawn-out process of tinkering with "down payments," such as tax credits and targeted tax cuts, will drain too much energy from the new Congress and in all likelihood will lead again to an inconclusive result. Such tinkering might even prevent the necessary restructuring of the tax system.

The real way for the new president to make a down payment on tax reform and get the economy growing rapidly again would be by issuing two complementary executive orders. First, the president should instruct the Treasury secretary to index against inflation the treatment of capital gains, retroactively as well as prospectively. This action would instantly remove the tax liabilities on several trillion dollars worth of capital assets mostly farm and real property but also including considerable financial assets held long term that are purely the result of inflation and are not real capital gains at all. While there remains a partisan dispute over the treatment of genuine capital gains, there has been broad bipartisan agreement that inflated gains should not be taxed.

Second, the new president should instruct the Treasury secretary to stabilize the dollar value of the nation's gold reserves, say within a $30 band, as a critical first step toward restoring sound money to America. This action would reinstate the dollar/gold link that was broken in 1971, which led to the most severe run of inflation in our nation's history.

The new president would find significant support for this move both in Congress and at the Fed. Fed Chairman Alan Greenspan has stated repeatedly that he places a high value on gold as an indicator of inflation expectations. This move would pave the way for Congress to enact Sen. Connie Mack's (R., Fla.) complementary legislation establishing price-level stability as the Federal Reserve's sole objective and requiring the Fed to establish explicit indicators by which to achieve this objective.

Restoring the dollar/gold link is the surest proven method of taking the risk out of the dollar and all other government debt. It has long been my belief that it will never be possible to balance the federal budget without some kind of dollar/gold link. For every percentage point that interest rates fall, the federal government would save more than $50 billion a year in interest outlays on its current $5.1 trillion national debt. That means we could save $1 trillion in debt-service costs during the next decade by refinancing the national debt at the much lower interest rates that would result when the risk of inflation was removed from the dollar.

The lower interest rates eventually as low as 3% on 30-year bonds and 4% on 30-year mortgages also would foster a dramatic increase in private-sector capital formation. Economists in both parties, supply-siders and demand-siders alike, agree that the living standards of wage earners can only rise with the kind of productivity increases that accompany rapid capital formation and lower long-term interest rates.

These two executive orders would create the kind of economic environment that would permit a genuine bipartisan reorganization of the responsibilities we entrust to the federal government. Even the most liberal Democrats will acknowledge in private that many political tasks would be more efficiently handled at the state and local levels. These Democrats strike a responsive chord with the electorate, though, when they argue against devolution of power in the current environment of economic anxiety and wage stagnation. If Republicans continue to offer Democrats an inviting target, they will leap at the political advantage of resisting change and derailing needed reforms in the name of protecting ordinary Americans against "extremist" Republicans.

But if we consider the legitimate interests of all Americans, even those left behind, there is no reason why, with a suitable transition, we can't move steadily toward a low, single-rate, simplified tax system, as recommended by the Commission on Economic Growth and Tax Reform, which I was privileged to chair.

The word "reform" is hardly sufficient to describe the work cut out for us. In my 25 years in national politics, with rare exceptions, we have had one reform after another that has left us in worse shape than before. We now have an opportunity for a once-in-a-lifetime reorganization of our federal government that is too obvious and important to be ignored. History will not forgive us if we do. As Ronald Reagan said, "If not us, who? If not now, when?"

Mr. Kemp is co-director of Empower America.