Restoring the American Dream
October 7, 2012
This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published October 5, 2012 on The American Spectator website.
President Obama told a sleepwalking America in his Democrat Convention Acceptance speech:
I won’t pretend the path I’m offering is quick or easy. I never have. You didn’t elect me to tell you what you wanted to hear. You elected me to tell you the truth. And the truth is, it will take more than a few years for us to solve the challenges that have built up over the decades.
But here is the actual truth, rather than a self-serving rationalization — with the right policies, America would be enjoying an historic boom before next Christmas, once again the world’s leading, most prosperous, superpower.
Let the Boom Begin
The boom would begin the day after Election Day, if Obama is defeated, and his party returned to minority status in both houses of Congress. Just as on Election Day, 1994, when the Republicans took over the Congress for the first time in 40 years, the stock market would immediately jump, on the expectation that President Romney and his new congressional majorities would reverse the neo-Marxist policies of Obama and his Che Guevara Democrats.
Obama told us at the Democrat convention that Romney and the Republicans are not telling us what their policies would be. “They want your vote, but they don’t want you to know their plan,” he said. But in fact they are running on probably the most detailed economic policies of any presidential campaign in history.
Romney has proposed a detailed tax plan, based on reducing tax rates. It is tax rates that powerfully affect economic growth, and particularly the capital investment that creates jobs and increases wages. That is because the tax rates determine how much of their production producers are allowed to keep. Lower rates consequently encourage greater production, and higher rates discourage production.
That is why Romney has proposed to cut income tax rates across the board for everyone by 20%. That is reminiscent of Reagan’s across the board cut of 25% in 1981 that was so dramatically successful, precisely for the reason just explained. Romney would also keep the Bush tax rates of 15% on capital gains and 15% on corporate dividends, which resulted in higher revenues when Bush reduced them, as well as all the other Bush tax cuts.
Contrary to Democrat mythology, those Bush cuts were heavily focused on low and moderate income workers, and the middle class. The bottom rate was cut by 33%, from 15% down to 10%, while the top rate was cut only by 13%, from 39.6% to 35%. Bush also doubled the child tax credit from $500 to $1,000. Both of these were very powerful in eliminating federal income taxation completely on the bottom 50% of income earners, and reducing the share of federal taxes paid by the middle 20% of earners to less than 5% of all federal income taxes by 2007. Those Bush tax cuts also reduced the middle class tax rate of 28% down to 25%, which Romney’s plan would further reduce all the way to 20%.
Romney’s plan would also eliminate federal income taxes completely on long-term capital gains, dividends, and interest income for middle class and lower income workers earning less than $100,000 and married couples earning less than $200,000. Denying these tax reductions to higher income workers in fact is counterproductive because they control so much more discretionary capital they can invest, or not. The taxes on capital gains, dividends, and interest are just unfair multiple taxation of investment income that is already taxed by the corporate and individual income taxes on the same investments. That just further discourages the investment essential to job creation and rising wages and incomes, all of which has disappeared under Obama and his Che Guevara Democrats. For these reasons, these multiple tax burdens should be eliminated for everybody.
Romney would also eliminate the death tax, which is just further multiple taxation of the capital involved in a lifetime of savings and investment that has already been taxed several times. That tax crushes many small business owners at death when they try to pass the family business on to their children, often forcing it to be sold just to pay the rapacious tax. Romney would abolish as well the hopelessly confused and misbegotten Alternative Minimum Tax (AMT). That tax was originally only supposed to stop the richest from avoiding any taxes, but now increasingly would apply to millions in the middle class, especially in high tax states like New York and California, which perversely results in higher federal income tax burdens as well under the AMT.
Then there are all the tax cuts that would result from Romney repealing Obamacare. That includes most importantly the individual mandate tax, upheld by the Supreme Court precisely because it is a tax. That mandate forces taxpayers to buy the expensive, politically correct health insurance not that they want to buy, but that Obama’s HHS Secretary Kathleen Sebelius decides they must buy. While Obamacare includes new health insurance welfare to help pay that cost soon for families making even over $100,000 a year, the net is still like a new payroll tax or income tax. And the new health insurance welfare entitlement is paid for by taxpayers too, of course, and so further represents increased taxes.
Then there is Obamacare’s employer mandate, still another effective tax, focused directly on jobs. The new costs on hiring imposed under that tax are already discouraging hiring, even among employers who currently provide health insurance to their workers, as under Obamacare employers will lose control over the cost of their health insurance, and have to pay for whatever Kathleen Sebelius decides they have to pay for.
In addition, Obamacare involves still another tax increase on investment, applying the Medicare payroll tax to capital gains, dividends and interest for the first time, and then increasing that tax by 62% on the nation’s job creators, investors, and successful small business owners. Then there are hundreds of billions in new Obamacare taxes on health insurance, medical devices, prescription drugs, even tanning salons, and others. Romney would be further cutting taxes by repealing Obamacare and all these tax increases.
The impact of these tax cuts on the budget would be offset first by the repeal of Obamacare. Second would be the impact of the tax rate cuts in restoring economic growth, which would produce new revenues to offset at least some of the revenue lost from the tax cuts. Romney has said as well that he would close loopholes and deductions in the tax code so that all the tax changes would be revenue neutral as a whole.
The great majority of deductions and loopholes in fact do benefit the higher income taxpayers, especially because the deductions are taken against higher rates at those higher income levels, and so result in bigger tax savings. Romney has said in fact that the loophole and deduction closings would focus on the higher income levels, so that “the rich” would not actually net any further tax cuts.
Left of center think tanks have argued that this tax plan could not be revenue neutral without a tax increase on the middle class. But Harvard economics Professor Martin Feldstein, the founding chairman of the National Bureau of Economic Research, demonstrated in the Wall Street Journal on August 30 that there were more than enough deductions and loopholes that could be closed to make the plan revenue neutral without a tax increase on the middle class. That leaves Romney’s tax plan as involving the largest middle class tax cut overall in world history.
Not telling you their plan? That claim is just more sweeping dishonesty from Obama. The truth is that the Romney campaign has provided more detailed than the Ob
ama campaign can handle.
Federal Spending, Deficits and Debt
Even more detailed are the views of the Romney campaign on federal spending, deficits and debt, because VP nominee Paul Ryan has already proposed two fully detailed federal budgets, which were both adopted by the full House.
That budget proposes to cut federal spending by $6.8 trillion over the next 10 years. For all the weeping and wailing and gnashing of teeth regarding that budget, all that it would do is return federal spending to its long-term, postwar historical average of 20% of GDP by 2015.
Obama’s all time record trillion dollar budget deficits would be cut by 86% after just 5 years, by 2017, as scored by CBO. And that is with old-fashioned, CBO, static scoring. With the long overdue booming economic growth generated by the Romney tax plan and other economic recovery proposals discussed below, the federal budget would most likely be entirely balanced by then.
Ryan’s budget would serve to get federal debt under control, reducing federal debt held by the public from 77 percent of GDP in 2013 to 62 percent by 2022, again as scored by CBO. That debt continues on a sharp decline thereafter, as the long-term effects of Ryan’s structural entitlement reforms phase in. Debt held by the public would be reduced to 53 percent of GDP by 2030, 38 percent by 2040, and 10 percent by 2050. That means the national debt is all but paid off by 2050, and, indeed, would be under dynamic scoring.
Of course, President Obama has his own proposed federal budgets. As I show in a forthcoming Policy Analysis from the Heartland Institute, his budget would do exactly the opposite of everything that the Ryan budget would do.
A third component of Romney’s economic plan would be to reduce regulatory costs and barriers to economic growth. That reduction would be focused on the massive overregulation erected under President Obama.
The most important component of that, among several economically critical reforms, would be the liberation of America’s energy industry. America now has the resources to be the world’s number one oil producer, the world’s number one natural gas producer, the world’s number one coal producer, and the world’s number one nuclear power producer. Under Romney’s energy plan, that is quite likely.
Romney would in particular retire the EPA’s administrative implementation of the cap and trade tax in the name of the global warming fantasy, without congressional approval. (Note: Before there can be global warming, the world has to be warming.) He would also terminate the EPA’s jihad against the coal industry. He would restore the permit process for nuclear power plants, and would not threaten the natural gas boom that has cratered natural gas prices for consumers with regulations against the fracking breakthrough.
He would also reverse the Dodd-Frank hyper-regulation, with hundreds of new regulatory mandates still in the pipeline, threatening the business and consumer credit essential to economic recovery, and the extinction of hundreds of small banks and financial institutions.
Of course, he would also reverse the Obamacare regulatory takeover of health care, terminating both the individual mandate and the employer mandate. These regulatory reforms would slash unnecessary costs holding down investment and job growth, and liberate the private sector to produce jobs again.
Strong Dollar Monetary Reform
The Fed’s monetary policy has gone completely haywire. The Fed is now buying 77% of all the bonds sold to finance Obama’s all-time record trillion dollar plus deficits. It has maintained negative real interest rates for years now, when that same policy was a central cause of the financial crisis. See, John B. Taylor, Getting Off Track (Palo Alto: The Hoover Institution, 2010). The Fed’s balance sheet of asset holdings has tripled, while bank reserve balances have increased by 200 times during Obama’s term.
All that monetary tinder is now out there waiting to be set aflame, to burst into the double digit inflation of the 1970s, if not worse. Fed Chairman Ben Bernanke says not to worry, he will withdraw all that excess money before it explodes into inflation. But doing so will be contractionary, sending interest rates soaring, and throwing the economy back into recession. With $16 trillion in national debt and more, a contractionary approach will explode federal spending, deficits, and debt. But ultimately the Fed will have no choice but to take that course, or completely trash the dollar with runaway inflation.
Consequently, the Fed has already laid the foundation for the return of double-digit inflation, and for the next recession, before we have even recovered from the last one. Perpetually rising gold is only signaling the ultimate collapse of the dollar. If that happens, with all of our experience since the 1970s, it should be considered treason.
All of this is only further discouraging job creating investment. Investors do not want to be paid back in depreciated dollars, wracked by inflation, and threatened with renewed recession.
Paul Ryan understands the solution to this — a new, modern link to gold to anchor the Fed’s monetary policy. That is known as the price rule, which means the Fed’s monetary policy will be guided by market prices for gold and other precious commodities, like silver and oil.
When such prices start to rise in markets, that signals the threat of inflation is rising, and the Fed should tighten monetary policy and the money supply. When such sensitive prices started to fall, that signals the threat of recession or even deflation, and the Fed should ease monetary policy. Following such monetary policies would avoid inflation and deflation, and cyclical bubbles and recessions, and maintain a stable value of the dollar. That promotes economic growth because investors know the value of their investments will be maintained without depreciation due to inflation or a declining value of the dollar, and cyclical recessions that might crash their investments will be minimized or avoided altogether, as during the long, Reagan boom from 1982 to 2007.
If Congress would impose such a price rule on the Fed, sharply constricting its irresponsible discretion, that could calm markets enough to ease us out of the Fed’s monetary policy trap. Ryan seems to be promoting a reawakening on this critical issue. Formally proposing this policy is the final component for a complete policy to get America booming again.
These four economic policy components would engender a new, generation-long economic boom, even greater than the Reagan boom, which would be blowing in a full force gale by next Christmas, restoring the American Dream, and America’s world leading superpower status. Romney/Ryan have provided more than enough detail to show the way. But the question is: Are the American people even paying attention?