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The Key to Recovery
Hint: It does not involve Alan Greenspan.

Mr. Moore is president of the Club for Growth
March 16, 2001 12:15 p.m.

he gray cloud of gloom that is now hovering over Wall Street and Main Street has a silver lining. The case for a very

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large tax cut is all the more persuasive. Even the Democrats are now saying we need a bigger fiscal stimulus than the president has proposed. George W. is wrong when he says that his tax cut is the ideal package for this moment. It might have been ideally suited for an economy cruising along at 5% growth — and that's what the growth rate was 16 months ago when candidate Bush proposed tax cuts. With zero percent growth and the NASDAQ down 60 percent from its high a year ago, a much bolder economic-recovery package is needed.

Budget surpluses are meant to be used as "rainy day funds." Folks, take a look at the window, or at the stock ticker streaming along the bottom of your TV screen. It's raining out!

A consensus is starting to emerge that the tax cut needs to provide a more immediate spark to the economy. Last week at his San Diego conference Arthur Laffer referred to the Bush tax cut as a "modest long-term plus for the economy." But he says it does almost nothing for the economy now. Almost all supply-siders agree. Certainly, something is needed before 2003 — which is when the Bush marginal income tax cuts at the top start taking effect. Two-thirds of the tax cut will take effect after 2003. In 2001 the GOP tax cut would reduce your taxes — hold on to your hats — by 0.5%. Don't spend it all in one place.

So why is the GOP tax cut so destined to fail? Because Republicans don't want to be accused of "raiding Social Security" or running budget deficits. So, how to get out of the box?

Two words: capital gains. I have said it many times before on this page, but it bears repeating: The 1997 capital-gains cut raised all sorts of revenues. In 1996, $60 billion was raised from capital gains. Last year we collected more than $100 billion. Lower rates, more revenues. The good news is that a cut in the cap-gains rate from 20 to 15% will be scored by the Joint Tax Committee as raising revenues in the first year and probably the first two years. We would pick up about $7 billion this year if the cap-gains rate were lowered to 15% effective April 1, 2001.

Now this is ideal. The cap-gains tax cut can be used to finance a steeper cut in the income-tax rates without pick pocketing the Social Security and Medicare funds. It's win-win.

The reason a capital-gains cut is so crucial is that this is the one tax cut that could provide an immediate stimulus to equity values. A cut in the capital-gains tax boosts the after-tax rate of return on stocks. This lifts the price. That happened in spades after the 1997 cap-gains cut. Stocks surged.

It is lunacy for the GOP to pass a tax cut that might take effect under Speaker Gephardt and Majority Leader Daschle — i.e., after the 2002 elections. But unless a more pro-growth tax cut is enacted between now and then, that's the dismal political future we're facing. It's not surprising that the Democrats don't want a bigger tax cut. But it is absolutely astonishing that so few Republicans do.

I hate to say I told you so — actually, I don't mind — but I have warned that if Bill Thomas were chosen as Ways and Means Committee chairman it would be bad news for Republicans and bad news for the tax-cut agenda. Thomas was the one who left out the retroactive feature of the income-tax cuts for the top rates. Why? Because, he told the House GOP caucus, "This way the Democrats can't accuse us of cutting taxes for the rich."

This is called pre-emptive surrender.

Of course, even by taking out the retroactive tax cut, the Dems are still screaming "tax cuts for the rich." So the GOP didn't buy any peace. More important, if the chairman of the Ways and Means Committee can't or won't take on the class-warfare lobby, we need someone in the job who will. The top marginal tax rates are the most critical to cut. The bottom rates are almost irrelevant in terms of promoting investment, savings, foreign capital infusions, and risk taking.

Denny Hastert, who chose Mr. Thomas over longtime conservative Phil Crane, made it known that Thomas would be a far more capable tactician and leader in taking on the likes of the ranking Democrat, Charlie Rangel, on the committee. Thomas has flunked his first big test.