Political Hay

Redeeming Newt

Gingrich is framing the issues for 2012. Will Republicans listen?

By 8.31.11

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President Obama, on the campaign trail already this month, has taken to attacking a "do-nothing" Congress. Apparently, he thinks he is going to reprise Harry Truman's shocking come from behind victory in the election of 1948, where Truman surged to narrowly win at the end with that do-nothing Congress theme.

Newt Gingrich is so right in urging his own "Leadership Now" theme for the Republican House majority. He argues that the House should not wait for the debt reduction Super Committee before passing legislation to address federal spending, the deficit, economic growth, and jobs. The House should show leadership now by passing legislation that will achieve these goals most effectively, demonstrating to the public what conservative Republican victories in the elections next year would accomplish.

The House got off to a good start on this theme in passing the Ryan budget on time early this year. It would have cut federal spending by $6.2 trillion over 10 years, reformed both individual and corporate taxes by closing loopholes and lowering rates, eventually balanced the budget, and even ultimately paid off the national debt. Of course, the Democrat majority Senate failed to adopt that or any other budget as required by law (which it has failed to do now for at least two years).

But the Republican controlled House persisted, passing Cut, Cap and Balance, which cut federal spending by over a hundred billion for next year alone, capped federal spending for the future at its long term, postwar, historical average of 20 percent of GDP (about one-fifth lower than current federal spending), and included a balanced budget amendment to the Constitution requiring balanced federal budgets each year -- just like in almost every state.

Once again, however, the Democrat-controlled Senate failed to pass Cut, Cap and Balance. You see, the issue is not really a do-nothing Congress, but rather a do-nothing Senate. To ensure that the public gets that distinction, the House should pick up Newt's Leadership Now theme, and pass legislation based on some of his ideas.

Tax Reform First

In demonstrating a Leadership Now mentality, the House should pass both individual and corporate tax reform. It should close loopholes that allow Obama political machine cronies like General Electric to get away with paying no federal income taxes, and lower the tax rates to get the economy booming again.

Tax rates -- not just tax cuts -- are the key factor in determining economic growth and prosperity. The tax rate, particularly the marginal tax rate (the rate that applies to the last dollar earned) determines how much the producer is allowed to keep out of what he or she produces. For example, at a 25 percent tax rate, the producer keeps three-fourths of his production. If that rate is increased to 50 percent, the producer keeps only half of what he produces, lowering his reward for production and output by one-third. Incentives are consequently slashed for productive activity, such as savings, investment, work, business expansion, business creation, job creation, and entrepreneurship. The result? Fewer jobs, lower wages, and slower economic growth.

By contrast, if the tax rate is reduced from 50 to 25 percent, producers will be allowed to keep three-fourths from their production, increasing the reward for production and output by one-half. That would sharply increase incentives for all of the above productive activities, resulting in more of them -- plus more jobs, higher wages, and faster economic growth.

Moreover, these incentives do not just expand or contract the economy by the amount of any tax cut or tax increase. For example, a tax cut of $100 billion involving reduced tax rates does not just affect the economy by $100 billion. The lower tax rates affect every dollar and every economic decision throughout the economy.

Furthermore, marginal tax rates do not just affect the incentives of those to whom the rates currently apply. They also affect those to whom the rates may apply in the future. For example, consider a small business owner. If he invests more capital in his business to expand production, or hires more workers to increase output, that may result in higher net taxable income. It is the tax rate at that higher income level -- not at his current income level -- that will determine whether he undertakes the capital investment, or hires more workers.

Ryan's budget included income tax reform with a 25 percent top income tax rate for family incomes over $100,000 a year, a 10 percent rate for incomes below $100,000, and generous personal exemptions leaving the first $40,000 a year for a family of four free of any income tax. It also included corporate tax reform, which addresses an enormous problem troubling the American economy.

The U.S. corporate income tax rate is virtually the highest in the industrialized world, with a federal rate of 35 percent. State corporate rates take it close to 40 percent on average. Even Communist China has a 25 percent rate. The average rate in the heavily socialist European Union is less than that, and formerly socialist Canada is cutting its 16.5 percent rate down to 15 percent next year.

The U.S. corporate income tax rates leave American companies uncompetitive in the global economy. Ryan's budget proposed a federal corporate income tax rate of 25 percent. The much lower individual and corporate rates from Ryan's tax reforms would cause a new economic boom with millions of new jobs and higher wages due to the resulting incentives for productive activities, as discussed above. Yet, with the closed loopholes, CBO has already scored Ryan's tax reforms as restoring federal tax revenues to the long run, postwar, historical average over the last 70 years of just over 18 percent of GDP. And that doesn't fully account for the economic growth that would result.

The Republican-controlled House should execute Leadership Now by passing Ryan's individual and corporate tax reforms this year. Let the do-nothing Democrat Senate sit on them. Then let's see what the voters have to say about it next year.

Spending and Entitlement Reform

The Republican House should also take the lead on spending cuts now, without waiting for the deficit reduction Super Committee, by passing Appropriations bills that implement all of the discretionary spending cuts of the Ryan budget. Those cuts were based on the popular plan of returning all non-entitlement, non-interest spending for all federal agencies and departments back to 2008 levels.

Gingrich raises a popular entitlement reform opportunity based on the enormously successful 1996 reforms of the old Aid to Families with Dependent Children program (AFDC), enacted while Gingrich was Speaker of the House.

Those reforms sent the federal financing for the program back to the states in fixed, finite block grants, with states empowered to redesign new welfare programs for the poor -- based on work. If a state's program cost more than its federal allotment, then it had to pay all of the extra costs itself. If its program cost lest, then it could keep the resulting savings.

With new incentives for the states, two-thirds of those on AFDC left the program for real private sector jobs. Their incomes rose by at least one fourth as a result, leading them out of poverty. And costs for the taxpayers dropped by half or more in real dollars compared to prior trends.

Those same reforms can and should be extended to Medicaid and all other federal means-tested welfare programs. Those programs are estimated to cost $10 trillion in total government spending over the next 10 years. The Republican House should act now to pass legislation effectively sending all those programs back to the states with block grants providing the discretion for the states to each enact a completely new welfare system based on work, as Gingrich suggested. That kind of Tea Party federalism would be enormously popular, as would the potential savings of $5 trillion over 10 years. Based on the 1996 reforms of AFDC, the poor would benefit enormously as well.

Gingrich also proposes legislation to increase revenue from oil and gas exploration and drilling through sharply increased federal leases and permits. That could raise $150 billion over roughly 10 years, with more coming from increased economic growth due to more abundant supplies of low cost energy for businesses. Gingrich also proposes to sell federally owned land and other unused and environmentally insignificant federal assets.

Gingrich is also pioneering the application of proven business efficiency and waste cutting methodologies known as Lean Six Sigma to government programs and agencies. Instead of waiting for the dangerously centralized Super Committee to develop plans for remaking the entire federal government, Gingrich argues that all 435 members of the House in almost 200 committees and subcommittees should be involved in developing ways to apply Lean Six Sigma business principles to government management, with potential cost savings of over $5 trillion. Gingrich argues that another $700 billion to $1.2 trillion over 10 years could be realized by applying the fraud detection techniques utilized by credit card companies to root out fraud in Medicare and Medicaid.

Regulation

The Republican House has another immediate opportunity: to pass legislation to counter the job-killing regulatory blizzard the Obama Administration is dumping on the American economy. The EPA is effectively imposing the cap and trade tax to counter imagined human-caused global warming, at an ultimate cost of trillions to the economy through soaring energy and electricity costs. The EPA's plan would ultimately involve phasing out the coal, oil and natural gas industries entirely. The House should pass legislation to strip EPA of authority to impose such highly unpopular global warming regulation.

House Majority Leader Eric Cantor (R-VA) seems to understand the opportunity here, promoting legislation to overhaul the federal government’s entire regulatory process through the Transparency in Regulatory Analysis of Impacts on the Nation (TRAIN) Act and the Regulations from the Executive In Need of Scrutiny (REINS) Act.

If the Republican House can act expeditiously to pass all of these ideas, and send them on to the do-nothing Democrat Senate, then Republicans can take these issues to the people next year, clearly defined.

And they can thank Newt Gingrich for many of them.

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.