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.
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.
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.
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?