GOP is not yet there on growth

Unresolved disputes on VATs, money, trade, and immigration by Lawrence (Larry) Kudlow at Kudlow and Company

Meet Larry Kudlow

The singular economic issue of our time is the quest for more rapid economic growth. In the past century the American economy grew at roughly 3.5 percent per year. That included huge booms and even worse busts, such as the Great Depression.

But over the past 15 years that growth has slumped to roughly 2 percent per annum. This has put average Americans in a cranky mood. They want change.

Though a list of current economic wrongs could go on forever, I see three major problems: an uncompetitive business tax code that blocks investment and job creation, a burdensome state-run regulatory apparatus, and an erratic monetary policy that has undermined the value of the dollar.

So, from the debates, how do the Republican presidential candidates stack up?

Most of the GOP candidates have pro-growth tax-cutting plans that would lower marginal tax rates on personal and business income. These plans would reinvigorate the incentive rewards for work, saving, and investment. Good.

But two candidates -- Ted Cruz and Rand Paul -- have proposed value-added taxes (VATs) on the corporate side. I think this is a big mistake, one that opens the door to big-government mischief.

By collecting VATs from businesses, and not listing them on customer receipts, the true costs for workers and consumers are hidden. The VAT also taxes labor and capital on top of existing burdens.

You can argue that these VATs are low, at 14.5 percent for Paul and 16 percent for Cruz. But like mushrooms and mustard seeds, these rates flourish once planted. (See Europe.) The Tax Foundation estimates that more than 70 percent of total taxes would eventually come from these hidden business VATs.

Simple and low flat-tax rates are a terrific idea. But not if supported by a VAT. And down through the years I have argued that if you want a sales tax, a consumption tax, or a VAT, you need to first repeal the 16th amendment, which launched the income tax. Otherwise, in the name of flat-tax reform, I fear we’d be opening the door to an even larger Leviathan.

This is why I prefer the more straight-forward corporate tax cuts of Jeb Bush and Donald Trump. They would lower the business rate to 15 to 20 percent, below China’s 25 percent, and would permit small S-corps to pay the lower C-corp rate.

And if you added in immediate full-cash-expensing tax deductions, a low-penalty-rate repatriation of U.S. cash parked overseas, and a move to a territorial tax system, you’d do more to stimulate the economy than anything else. And if you coupled that with vastly reduced regulatory burdens, you could produce 4 to 5 percent growth for at least the next ten years.

Stable money is the next big growth issue. To their credit, many of the Republican candidates have talked about this -- which is unusual for a presidential race. Some, like Cruz and Paul, have discussed restoring the gold rule. Others, like Mike Huckabee, have argued for tying the dollar to a commodity basket.

I prefer an even broader approach that would include the exchange value of the dollar and Treasury-bond-market inflation expectations. In each case you would track forward-looking inflation-sensitive market-price indicators, as was done from the mid-1980s to mid-1990s by former Fed board members Wayne Angell, Manley Johnson, Robert Heller, and Alan Greenspan -- all Reagan appointees.

I’d also have no problem keeping a sharp eye on the growth of nominal GDP. But as Paul Volcker has argued, we should return to a rules-based monetary policy with international cooperation.

And as the GOP searches for a monetary rule, it should not become the party of high interest rates. (I don’t agree with Trump and Chris Christie that a zero-interest-rate political fix is in to help Obama through his final months without a recession.)

Right now, with commodity indexes falling, the dollar rising, and various consumer price deflators showing zero inflation, neither the Republican party nor the Fed should panic. Domestic price stability and a steady-value dollar should be the goals.

Regrettably, in two other key growth areas -- trade and immigration -- the GOP is hopelessly divided. Just like taxes, regulations, and money, these are big growth impactors. And the debate has to be resolved, if only through the ballot box in the primaries.

Make no mistake: Growth is the central economic issue of the day. Not redistribution. Not inequality. Growth.

Nobelist Angus Deaton argues that growth helps solve poverty. And Princeton University philosopher Harry Frankfurt says “our most fundamental challenge is not the fact that the incomes of Americans are widely unequal.

It is, rather, the fact that too many of our people are poor.” Frankfurt is a self-described progressive. But he has the story exactly right ~ Growth.

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