The single-best thing the lame-duck GOP Congress can do is vote in a spending-limitation bill with balanced-budget targets for the next couple of years. This would be a spending-cap pay-as-you-go, which means that any increased spending must be offset by lower spending in other parts of the budget. Not higher taxes. Reduced spending.This policy action would send a clear message to disaffected Republicans and independents (think Ross Perot voters) that the GOP is moving to regain the high ground on limited government and budgetary restraint.
The era of big-government conservatism must come to an end. And right now.
In the new Congress next year, Democrats will push a revenue paygo. This means any new spending initiatives could be financed through higher taxes. And Democrats want to spend. Just take a look at their wish list: student loan subsidies, a major expansion of No Child Left Behind, more money to fill so-called “doughnut hole” (Medicare Part D) prescription-drug assistance, and an expansion of health care for the uninsured on the way to universal health coverage.
We could be talking hundreds of billions of dollars of budget increases that under a revenue paygo system would require higher tax rates.
Many Democrats are saying there’s a $350 billion “tax gap” that could be collected from tax deadbeats. But this is a huge reach. Sure, a tax amnesty, such as the one proposed by supply-side economist Arthur Laffer, would bring in good money. But not enough to fund the Democratic spending machine.
The GOP must preempt this with a spending-cap approach that will maintain low tax rates and grow the economy. They must show voters that they’re moving back home to small government.
As poll after poll shows, overspending cost the Republicans dearly in the recent election. According to polling by Pat Toomey’s Club for Growth, two-thirds of voters in 15 key swing districts believed Republicans in Washington have overspent. Democrats, on the other hand, were predominantly seen as eliminators of wasteful spending. By more than two-to-one, voters preferred the candidate who would cut spending. By a similar margin, swing-district voters favored keeping the Bush income-tax cuts, and by five-to-two supported keeping the capital gains and dividend tax rates low. By almost three-to-one respondents desired a repeal of the death tax.
A full 54 percent of respondents to a recent CNN poll said they believe government is trying to do too many things that should be left to individuals and businesses. Only 37 percent said the government should do more to solve the country’s problems.
The message? Cut spending and keep tax rates low.
The latest Treasury report on budget spending and tax receipts is noteworthy. Revenues continue to soar at roughly a 12 percent pace, a trend that began more than three years ago when the Bush tax-cut plan was implemented. Meanwhile, spending continues to expand at an 8 percent rate. So here’s the tragedy: If Congress had held spending in the last three or four years to 6 percent annually — still twice the inflation rate — we would have a balanced budget by now.
In economic terms, it’s hard to find any clear links between deficits and the economy. In fact, as lower tax rates have expanded the economic pie, thereby throwing off a huge volume of new tax collections, the deficit has come down to only 1.9 percent of GDP. As for overall U.S. Treasury debt, this remains below 40 percent of GDP — lower than any of the other G7 industrial countries. What’s more, both 10- and 30-year Treasury bonds currently yield less than 5 percent, strongly suggesting that there is no looming U.S. debt crisis.
And yet, in political terms, many voters are unhappy with debt creation to finance bigger government. On the radio I am constantly hearing callers ask, “How will we ever repay this debt?” It’s a nagging political attitude that Republican strategists have long overlooked.
In November 7 exit polls describing the most important voter issues, the economy weighed in at 82 percent, corruption at 74 percent, terrorism at 72 percent, and Iraq at 67 percent. Possibly, it’s still the economy, stupid. Despite plunging gas prices, a low 4.4 percent unemployment rate, and a soaring stock market, voters are worried that debt-financed overspending will make the future economy worse than today’s.
During the Gingrich congressional years, and particularly during the fight for the balanced-budget amendment of 1997, limited spending coupled with low tax rates was the winning message that gathered both conservatives and Ross Perot independents into the GOP tent. Now is the time to return to these very same principles.
The recent passing of Nobel economist Milton Friedman, who for decades advised Republicans to maintain this limited-government, low-tax message, should be another reminder and a spur to action.
– Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s Kudlow & Company and author of the daily web blog, Kudlow’s Money Politic$.