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Kerry on economics: A kinder, gentler Mondale
By W. James Antle III
Every major presidential candidate must take part in that quadrennial ritual of introducing a plan to solve what the chattering class considers to be the nation's most pressing economic problems. Adding to this challenge is that whatever the candidate comes up with must roughly coincide with his party's preferred fiscal nostrums. While the problems change, the solutions don't.
It is in this context that John Kerry trekked to Wayne State University in Detroit for the grand unveiling of his economic program, with which he intends to add 10 million new jobs, crack down on those "Benedict Arnold" CEOs who are said to be "outsourcing America" and force that wicked top 1 percent to finally pay its fair share of taxes. The last points to the difficulty inherent in the Democratic nominee achieving his first two objectives: The fiscal policy solutions of choice in Kerry's party are raising taxes and spreading the wealth with a generous hand, two time-honored liberal panaceas which alienate swing voters and are decidedly anti-growth.
But Kerry's no dummy. While Howard Dean wanted to follow Walter Mondale off the cliff by proposing an across-the-board tax increase, Massachusetts' junior senator prefers following the example of Bill Clinton. His package is a mishmash of tax cuts and tax increases, with the latter targeted against those with incomes in excess of $200,000 a year, similar to what Clinton campaigned on in 1992. He is bargaining that the voters won't care about raising someone else's taxes – the old quip, "Don't tax you and don't tax me, let's tax the man behind the tree."
Of course, Clinton's middle-class tax cut ended up being dumped from his 1993 economic plan before being presented to Congress and the expansion of the earned-income tax credit (which Clintonites often point to as evidence that their man cut more people's taxes than he raised) mainly increased the number of people with no income-tax liability who received subsidies from other taxpayers. Given the coming collision of real-income bracket creep and the alternative minimum tax, one needn't go very far out on a limb to guess that a similar tax hike to tax cut ratio might be the result of Kerry's policies.
Kerry proposes a slight cut in the corporate tax rate from 35 percent to 33 ¼ percent. But this would be offset by the tax increase borne by small-business owners and entrepreneurs in the top personal income tax bracket. Higher taxes on dividends and capital gains would have a detrimental impact on investors and the cost of capital.
Nor does the Kerry plan take into account the impact higher marginal tax rates have on incentives to engage in income-generating activities. Larry Kudlow, who I often disagree with but tends to be sensible on tax policy, took note of this in his analysis for National Review Online: "The Kerry proposal to rollback the Bush tax cuts would raise the after-tax cost and reduce the post-tax investment return on capital by more than 54 ½ percent. Taking out the upper-bracket labor-income component -- which is still investment capital -- the Kerry tax hike would reduce investment incentives by nearly 47 percent and work-effort returns by more that 7 ½ percent."
The Kerry plan's penalties on U.S. companies with operations abroad would probably do more to depress exports than halt outsourcing. He also proposed tax credits to subsidize job creation. But past "human employment tax credits" have been found wanting. In an economy that creates and destroys more than 2 million jobs a month it is difficult to identify such jobs and attribute them to the tax credit. Many companies end up being rewarded for hiring workers they would have hired anyway. A study by the Clinton Labor Department, for example, concluded that 92 percent of the new jobs cited in claiming the tax credit would have been created anyway and that the program cost three times more than it returned in employment gains.
These tax credits also second-guess the market and distort companies' decision-making by arbitrarily rewarding them for filling certain jobs rather than making the kinds of gains in output and productivity that create jobs and sustain economic growth long-term.
Bruce Bartlett argued on his website, "In conclusion, it appears that Kerry has chosen as his centerpiece jobs program two initiatives that will be ineffective at best and positively harmful at worst. No serious economist thinks they will create anywhere close to 10 million jobs, as Kerry claims."
The idea that raising marginal tax rates, especially on the rich, will grow the economy is based in part on perceptions of what worked during the Clinton years. According to "Rubinomics," a fiscal policy approach identified with Clinton Treasury Secretary Robert Rubin, higher taxes can be a boon for GDP if they reduce budget deficits, thus lowering interest rates. But the connection between lower interest rates and the 1993 Clinton tax increase is tenuous at best.
Other arguments in favor of Rubinomics depend on a selective reading of the 1990's economic history. The rate of economic growth actually declined immediately following the increase in marginal income tax rates and the one-third increase in the top rate generated far less revenue than had been projected. By the time economic growth really took off and the budget moved into surplus, there had been an offsetting tax cut that slashed the capital gains tax rate from 28 percent to 20 percent and government-limiting measures ranging from welfare reform to reductions in nondefense discretionary spending.
The best that can be said for the decision to raise the top marginal income tax rate to 39.6 percent under Clinton was that it neither prevented significant growth later in the decade nor fulfilled the most hysterical Republican predictions of economic disaster. It did, after all, still leave Ronald Reagan's tax cuts substantially intact. The same is likely to be the best possible result if Kerry's proposal to return the top tax rate to 39.6 percent were enacted.
Bush would be in a much better position to challenge Kerry on fiscal policy if it weren't for all the spending, borrowing and monetary pump-priming he has supported during his administration. Some of the GOP's standard-issue economic nostrums aren't faring any better as solutions to today's problems; in numerous other cases, the White House and congressional Republicans aren't living up to their free-market, small-government rhetoric nearly enough.
None of this changes the fact that Kerry's idea of stimulating economic growth and creating new jobs is to offer a grab-bag of warmed-over proposals culminating in a net tax increase. Clinton may have taught the Democrats to use rhetoric more soothing to taxpayers and businesses than Mondale, but on substance it is evident that the party's comprehension of markets, growth and wealth creation has progressed little in the last 20 years.
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