Last Friday I attended the speech by Newt Gingrich at Art
Laffer’s annual Investor Conference in Washington, D.C., where
Gingrich unveiled his own economic recovery program. This wasn’t
just campaign rhetoric. The speech was specific, detailed, and
comprehensive.
Laffer himself, who was central to defining the economic
policies that produced the 25-year Reagan economic boom, said
regarding Gingrich’s economic plan, “The combination of pro-growth
tax reform, spending restraint, and sound money will restore robust
economic growth with low unemployment and low inflation.” Moreover,
Laffer added, given the dramatic reductions in tax rates as
discussed below, “in due course, the plan should be surprisingly
inexpensive from the standpoint of lost revenues given the powerful
effect it will have on the future growth path of the United States
economy.”
The Coming Crash of 2013
President Obama has gotten away so thoroughly with driving
the narrative and defining the debate that too many have overlooked
what he has already set in store for the American economy in 2013.
Already scheduled in current law for that year is the expiration of
the 2001 and 2003 tax cuts, which Mr. Obama has refused to renew
for single workers making over $200,000 a year, and couples making
over $250,000, disparaging them as “millionaires and billionaires.”
Also scheduled to go into effect in 2013 under current law are all
the tax increases of Obamacare. Together, these job killing tax
policies would result in a sharp increase in the tax rates on the
nation’s small businesses, job creators, and investors for
virtually every major federal tax.
The top income tax rate would increase by nearly 20%,
counting the slashed income tax deductions Mr. Obama already
proposed in his February budget. The capital gains tax rate would
increase by nearly 60%, counting the new Obamacare taxes on
investment income. The total tax rate on corporate dividends would
increase by three times altogether. The Medicare payroll tax rate
would also increase by 62% for these taxpayers. The death tax would
rise from the grave with its original 55% top rate.
Unless reversed, these economic policies threaten to be
the coming crash of 2013. That is why Gingrich first proposes
repealing all of these tax increases, including Obamacare in its
entirety.
But to produce robust economic growth, he proposes to go
well beyond that. He proposes to abolish the capital gains tax
altogether, which is just an additional layer of taxation on
capital income, in addition to the individual income tax, the
corporate income tax, and the death tax. That is why fourteen out
of thirty OECD countries, plus China, Taiwan, Hong Kong, Singapore
and others, already enjoy zero capital gains taxes.
Gingrich proposed as well corporate tax reform that would
reduce the federal corporate tax rate to 12.5%. America today
suffers from virtually the highest corporate tax rate in the
industrialized world, with a federal rate of 35%, and the states
pushing it to close to 40% on average. Yet, much of the rest of the
world, ironically, has learned the lessons of Reaganomics. The
average corporate tax rate in the European Union has been slashed
from 38% in 1996 to 24% today. Canada’s rate has been cut to 16%,
scheduled to decline to 15% next year, with the ruling Conservative
Party recently rewarded with a strong majority of its own in new
elections. Lower corporate tax rates prevail among our major
competitors in Germany, China and India as well. With a corporate
tax rate of 12.5% first adopted in 1988, Ireland enjoyed a soaring
increase in per capita income from the second lowest in the EU to
the second highest. Our own Treasury Department published a study
showing that Ireland raises more corporate tax revenue as a percent
of GDP with that 12.5% rate than we do with our much higher rate.
How are American companies supposed to compete in the global
marketplace with such a disadvantage?
Gingrich’s plan also provides for 100% expensing of
investment in new equipment so American workers can work with the
most technologically advanced tools in the most advanced factories
in the world. Gingrich proposes as well to end permanently the
death tax and its double taxation of the lifetime savings of
Americans.
Finally, Gingrich proposes an optional flat tax of 15%.
That means that taxpayers would be free to choose to file their
taxes under the current system with all of its complexity, or the
new reformed alternative system, where their taxes could be filed
on a postcard, saving hundreds of billions in unnecessary costs
each year.
Beyond Taxes
But the Gingrich plan goes beyond tax policy. He would
reverse the fundamental Bush blunder of a cheap dollar policy,
which pumped up the housing bubble with loose monetary policy. That
blunder has been multiplied many times over under Obama, just as
Obama has done with everything that Bush did wrong. Gingrich
proposes instead to return to the Reagan-era, stable dollar
monetary policies that halted the runaway inflation of the 1970s,
never to be heard from again, until recently. He also proposes
fundamental Fed reform to provide for transparency of all Fed
activities, and permanently end bailout abuses.
Another major component of the plan is deregulation.
Gingrich proposes to outright repeal Sarbanes-Oxley, which only
adds unnecessary costs that have deterred job-creating investment
in the United States and undermined the international
competitiveness of America’s financial industry. He proposes to
repeal as well the Community Reinvestment Act, which was abused to
help cause the financial crisis. He called as well for breaking up
Fannie Mae and Freddie Mac, and moving their smaller successors off
government guarantees and into the free market.
Underlining his opposition to any cap and trade policies,
Gingrich proposed to replace the Environmental Protection Agency
with an Environmental Solutions Agency. That is to achieve a
fundamental change in environmental policies from anti-growth
confrontation with industry to collaboration with job creators to
achieve better overall results. He also proposes to modernize the
Food and Drug Administration, recognizing the need to get
lifesaving medicines and technologies to patients faster, and to
remove cost barriers to their rapid development.
Deregulation is also central to the American energy policy
Gingrich also advocated. Even at the height of Obamamania in the
summer and fall of 2008, Gingrich’s “Drill Here, Drill Now, Pay
Less” campaign was instrumental in leading then President Bush to
rescind the Executive Order banning offshore drilling, and Congress
to let the statutory offshore drilling ban expire. Gingrich last
Friday called for freeing the energy industry to maximize
production of all forms of American energy, from oil to natural gas
to clean coal to nuclear power to all forms of alternative fuels.
That would assure the reliable supply of low cost energy essential
to fueling a booming economy.
Gingrich also called for a balanced budget, first through
restoring booming economic growth that would revive surging
revenues and itself reduce spending obligations. But that would
also involve sharp spending reductions and money-saving reforms
that were specified in detail in his 2010 book To Save
America, similar to the policies adopted by the Republican
Congressional majorities he led in the 1990s to balance the budget
then, as discussed further below.
That would also include fundamental entitlement reforms.
In To Save America, Gingrich explicitly called for each
worker to have the freedom to choose personal savings, investment,
and insurance accounts eventually to finance all of the Social
Security and Medicare benefits now financed by the payroll tax,
eventually displacing that tax entirely. He also called for sending
all federal welfare programs back to the states with the same
welfare block grant reforms adopted in 1996, as also discussed
below. The reduction in federal spending that would ultimately
result from such reforms would be unprecedented.
Reaganomics
President Reagan’s economic program included four
components, explicitly articulated in his speeches and proposals
throughout the 1980 campaign. Those included sweeping reductions in
tax rates to restore incentives for investment, job creation, and
economic growth. It included spending reductions as reflected in
the much vilified at the time Reagan budget cuts. It included
restrained monetary policy that slashed the 25% increase in prices
over 1979-1980 to less than half by 1982 and less than half again
by 1983, taming inflation. And it included deregulation that
reduced costs for consumers and in particular unleashed the private
sector at the time to produce bountiful American energy.
Each of these components are included in the Gingrich plan
in spades. With a 15% optional flat tax, a 12.5% corporate tax,
zero capital gains and death taxes, and 100% expensing for
investment, the plan includes full scale supply-side policies that
cannot be improved upon. That applies as well to monetary policy
which is also essential to economic growth, often publicly
overlooked. The comprehensive energy policies that Gingrich has
advocated for years would restore a world leading American energy
industry with good paying jobs.
Just as Reaganomics created a record-smashing,
world-leading, 25-year economic boom, the comprehensive economic
policies Gingrich advanced last Friday would in my opinion restore
booming, long-term, job-creating economic growth to
America.
The Record
Gingrich’s record as Speaker of the House in the 1990s
provides a strong foundation of credibility for these policies. His
famed budget clash with President Clinton leading to a government
shutdown resulted in policies that not only balanced the budget but
produced $560 billion in budget surpluses over four years from 1998
to 2001. That resulted from cutting rather than increasing tax
rates, most particularly a nearly 30% cut in capital gains rates,
and sharply restrained spending that allowed revenues from the
growing economy to surge past spending.
Total federal discretionary spending, as well as the
subcategory of non-defense discretionary spending, declined from
1995 to 1996 in actual nominal dollars. By 2000, total federal
discretionary spending was still about the same as it was in 1995
in constant dollars. As a percent of GDP, federal discretionary
spending was slashed by 17.5% in just four years, from 1995 to
1999. Total federal spending relative to GDP declined from 1995 to
2000 by 12.5%, a reduction in the federal government relative to
the economy of about one-eighth in just five short
years.
This was accomplished in part by important entitlement
reforms. The New Deal era Aid to Families with Dependent Children
(AFDC) program was sent back to the states with federal spending on
the program limited to finite block grants for each state that
remained flat in nominal terms for at least a dozen years, saving
taxpayers hundreds of billions over that time from prior trends.
Two-thirds of those on the program went to work as a result, and
enjoyed a 25% increase in family income. Gingrich also led adoption
of Freedom to Farm, which provided for a phase-out of New Deal era
farm subsidies.
It was after Gingrich retired as Speaker and Bush was
elected that the Republicans lost control of spending, more than
reversing the Gingrich gains with a one-seventh increase in
government spending relative to GDP. The Congress ditched Freedom
to Farm, although the AFDC block grants survived because they were
so undeniably so successful.
Gingrich successfully led a national revolution against
the Democrats before, rising from the backbenches of the House to
guiding a persistent Republican takeover of Congress for the first
time in 70 years, continuing for a dozen years. Can he do that
again?
