About two years ago Treasury Secretary designate Paul O’Neill was already telling Congress that tax cuts don’t matter. He then went to Wall Street and told traders that they also don’t matter. But in the end, it turned out that Paul O’Neill didn’t matter.
In total contrast to the hapless O’Neill, it is a delight to watch new Treasury man John Snow stay completely on message.
In his first testimony before the Senate Finance Committee, Snow was hectored by Sen. John Breaux (D., La.), who immediately applied the word “reckless” to President Bush’s tax-cut proposal. When he demanded to know when Snow would begin to compromise, Snow replied, “Sir, I am here to advocate the president’s full proposal.”
As Democrats attempted to flog the budget deficit rather than deal with the growth merits of the tax package, Snow argued that “the prescription for returning to balanced budgets is straightforward: hold the line on spending and grow the economy.” He also argued strongly that eliminating the double tax on investor dividends is just as much of an economic growth tonic as reducing marginal tax rates on personal incomes.
In the days ahead, Snow will be busy selling the president’s plan, which includes significant expansion of tax-free supersaver accounts, a large cash expensing bonus for small business investment write-offs, speedier marriage-penalty relief, tax credits for children, and faster cuts on personal taxes and dividends. So far, Snow has been well received on the Hill, and he’ll next take his show to Wall Street, where he is expected to praise the stock market’s capital-raising functions as vital to economic growth.
The White House, it seems, is set to wage a full-scale battle to sell the president’s proposal. Bush himself will be on the warpath, as will top economist Glen Hubbard, first friend and commerce secretary Don Evans, and labor secretary Elaine Chao.
Those pundits predicting a dead-on-arrival tax package are likely to be proven wrong. Despite the usual early grousing that always seems to accompany big-bang anti-status-quo reforms, senior White House staff expect 49 Republican votes in favor of the president’s package — all but the liberal Lincoln Chaffee and the eccentric John McCain. It is likely that a well-known Southern Democrat will introduce the package in the Senate, and GOP insiders believe the extra two votes will be provided by moderate Democrats like Indiana’s Evan Bayh, the two Nelsons (Nebraska and Florida), Blanche Lincoln of Arkansas, Louisiana’s Mary Landrieu, or perhaps even John Breaux.
Ironically, in the rough and tumble political world of Washington, the dividend tax-cut plan has become so controversial that it has pushed formerly hot-button marginal rate cuts below the radar screen. Demand-side lawmakers fail to understand that a shortage of capital, not consumption, is the key problem plaguing stock markets and the economy.
This is because prior recessions over the last thirty years have been caused primarily by inflation from excessive Federal Reserve money-creating. Today’s problem can be attributed to the lingering effects of an investment collapse that began in early 2000. As capital values in the stock market were eviscerated, and businesses were unable to gain access to credit and liquidity, they have been forced to pull back operations and lay off workers.
On the Hill and around the country, John Snow’s job will be to convince doubters that the first investment-inspired slump since the 1930s requires policy measures aimed at reducing the after-tax cost of capital and increasing the post-tax reward for investment. Capital-raising incentives are crucial to the stock market and business financing. Snow must also explain the link between personal saving and economic growth.
In the 1930s, the prevailing view was that Americans stuffed savings in the mattress. That’s not the case today. Wall Street firms, mutual funds, financial advisors, and insurance companies are all low cost and easily accessible. And they turn savings into growth by channeling investor cash flows into corporate stocks and bonds. This is a process that many do not fully understand.
Snow’s task will be to communicate the message that reducing the tax bite on investment, and wherever possible taxing income only once, is the key to returning the capital that our corporations need. More capital will re-ignite business, raise productivity by providing workers with the best possible equipment, and increase real wages and profits.
For Snow & Co., it’s a tough day’s work, but well worth it. Only a surge of new investment will lead the nation into true recovery and bring back the stock market.
— Mr. Kudlow is CEO of Kudlow & Co.