The big sticking points between the House GOP leadership and Sen. Harry Reid’s latest plan are 1) the House wants two debt increases, one this year and one next year (Reid has just one increase) and 2) the House Republicans want a guaranteed balanced-budget-amendment vote.
Regarding the Reid plan itself, it really looks like a Republican plan: A $2.7 trillion spending cut to raise the debt ceiling by something like $2.5 trillion, and no tax revenues. So, really, what’s so bad about the Reid plan? Increasingly, Wall Street gurus want one debt-ceiling increase, not two.
The Reid package includes $1.2 trillion in discretionary-spending cuts and a small $100 billion savings in mandatory accounts, apparently from the Biden meetings, although it will not impact either health care or Social Security.
There are other nicks and knacks from waste, fraud, and abuse, fees on Fannie Mae and Freddie Mac, revenues from spectrum sales, and some sort of farm-subsidy reform. And there is, of course, a huge $1 trillion piece from winding down the wars in Iraq and Afghanistan. But that’s also in the budgets from Paul Ryan and the CBO. Interest savings come to $400 billion.
Reid’s plan also includes a Mitch McConnell-like joint-congressional committee to find future savings. The committee’s recommendations will be guaranteed an up-or-down Senate vote without amendments by the end of 2011.
The GOP House plan undoubtedly has more real spending reduction. Plus, the balanced-budget amendment, which makes it consistent with cut, cap, and balance.
But the Reid no-tax piece is really important in terms of economic growth. At least things may not get worse on the tax front.
Finally, all these plans hinge on tough enforcement for the spending caps. In particular, first-year 2012 savings, and then sequestration penalties. It just looks like the House and Senate are coming together.
There are a lot of known unknowns about the new “Gang of Six” budget proposal. But conservatives should hold back from trashing it. Why? There’s a large, pro-growth tax-reform piece in the plan that would lower tax rates across-the-board. This is a stunning reversal of the Obama Democrats’ soak-the-rich, class-warfare campaign.
The best part of the Gang of Six plan is a reduction in the top personal tax rate from 35 percent to a range of 23 to 29 percent. For businesses, the rate would drop in the same manner. And the corporate tax would be territorial rather than global, thereby avoiding the double tax on foreign earnings of U.S. companies. Finally, the plan would abolish the $1.7 trillion alternative minimum tax. That’s huge. It’s another pro-growth tax reform.
There seems to be a spirit of compromise in the new “Gang of Six” proposal. But the plan also raises a lot of important questions. Can it get done in time for the critical August 2 debt-ceiling deadline? Are the spending cuts real? There are lower tax rates and tax reform for personal incomes and businesses, although the capital-gains tax will go up. It appears IRAs and 401(k)s will be tax exempt.
On last night’s Kudlow Report, I spoke with key congressional members on all of the latest developments. Joining me were Sen. Tom Coburn (R., Okla.), a member (perhaps the ringleader) of the aforementioned “Gang of Six,” and Sen. Jeanne Shaeen (D., N.H.). Shortly thereafter I spoke with GOP maverick Sen. Rand Paul. He’s got the right spirit and the right vision to shrink government and grow the economy. He also believes the tea party is winning.
Here are the videos and transcripts for both interviews.
KUDLOW: So question is, will the revived Gang of Six debt talks really bring a bipartisan solution to stave off default? Here now we welcome to the show New Hampshire Democratic Senator Jeanne Shaheen, and we welcome back Oklahoma Republican Senator Tom Coburn. He’s a member of the aforementioned Gang of Six. Some think he’s the real ling–ring leader.
Senator Coburn, let me begin with you. Explain to us–before we get to the actual plan, which is very complex, how does this graphed on to the debt ceiling increase? Can you get it in time for August 2nd? Do you have to take a specific vote to raise the debt? How does this work, sir?
COBURN: Well, I–it’ll be difficult for us to do it in that time. I think it can be done. It depends on if the leadership in the Senate and the leadership in the House gets behind this, or something similar to it. I think the breaking of the log jam says is that you can revenues that come through economic growth that would enhance the government’s budget position. You know, there’s all sorts of ways that you could do it. You could set a timeline and have a vote based on what the hard pay amount–payments are 500 billion right now and allow a debt increase that would go to that amount. And then if we’ve done the rest of the work by then, go on and allow it to go on and increase. Or you could say the whole thing is contingent on us doing this at some time in the future and there will be a limited amount of debt limit increase.
COBURN: So I think it’s possible for it to happen, Larry. I don’t know if it will, but I think it’s certainly possible.
KUDLOW: Well, Senator Shaheen, I guess I ask you the same question. Is itpossible? Because the clock is ticking, this evening is July 19th. August 2nd is the drop dead day. The whole world is watching, as you well know. And do you think legislatively this can get done? You’ve got the House, the House Republicans. I don’t know what their view is on this, but it seems like this is kind of a Hail Mary pass, Senator Shaheen.
SHAHEEN: I–well, I think it’s an important bipartisan framework to get a deal done that would address our long-term debt and deficits, and the fact is we have a two-part challenge. One is how we’re going to deal with the debt and the deficits. And the second is what are we going to do to raise the debt ceiling so we don’t have financial catastrophe. And as Senator Coburn said, there are a number of different ways to do this, and hopefully we can get the leadership behind it and work it out so we can not just increase the debt ceiling and deal with the short-term concerns that we heard earlier from the businesswoman who talked, but we can actually put in place a long-term deficit reduction plan that will deal with this country’s debt.
KUDLOW: Senator Shaheen, just let me ask a follow-up, are you OK with closing down the long-term health insurance plan, the so-called CLASS Act that was embodied in Obamacare’s health act? Are you OK with that? Is that going to be a controversial point?
SHAHEEN: You know, I think there are going to be a number of pieces in any proposal that we can all agree to that individually we don’t like. But I think the question is, are we going to be willing to put everything on the table–discretionary spending, defense spending, mandatory programs and revenues–and are we going to be willing to work out a bipartisan solution that’s going to be in the best interest of this country? And that’s what I’m interested in doing.
KUDLOW: Senator Coburn, a lot of people, as you can well imagine, are worried about 1 to $1 1/2 trillion in revenues. I know you’re using the Bowles-Simpson marginal tax rate relief, but here’s some of the issues that are being tweeted as we talk this evening. What’s going to happen to 401(k)s? What’s going to happen to IRAs? What’s going to happen to capital gains? And is the AMT tax cut really real?
COBURN: The AMT tax cut would be completely eliminated. It’s real. Nothing will happen to 401(k)s at all. There–there’s no change on that. None of that is contemplated. The fact is is there’s plenty of room to grow this economy if you make really cuts in the rates. And we saw it during the Reagan–Larry, you know this. We have 4.9 percent average for four years of real economic growth when we did this same thing back in the ’80s.
KUDLOW: How about–how about IRAs, Senator?
COBURN: Same thing.
KUDLOW: You’re saying nothing will happen to 401(k)s.
KUDLOW: Nothing will happen to IRAs. How about the capital gains tax, sir?
COBURN: The capital gains will resume under what is considered the law. It’ll go back to 20 percent rather than be at the same rate–and the Bowles-Simpson, the capital gains was at the rate of what the new tax rates were. So we’ve actually made it better than what it was in the Bowles-Simpson, so it’ll be at 20 percent.
KUDLOW: All right. That is better. Senator Shaheen, also on the revenue side, it’s about 2-to-1, as I understand it, spending cuts to revenue increases. Will that pass muster on the Democratic side?
SHAHEEN: Well, again, I think the question is, do you want to put in place a long-term proposal that’s going to produce almost $4 trillion in cost savings, which is what everybody who’s looked at this in an objective way says we’ve got to do? And are you willing to put everything on the table to arrive at a compromise? And I think that’s what the framework that this proposal that three Democrats and three Republicans have been working on for about seven months, have come up with. And I think there are a number of us who are ready to say this is an approach that we think we ought to be following. We need to raise the debt ceiling. That’s critical to the finances of this country. It’s critical to every family out there who’s paying a mortgage or car payment or has a credit card bill, because we don’t want their costs to go up. But we’ve also got to deal with the long-term challenge of the debt that this country is facing, and we’ve got to do it in a way that’s going to be good for future growth in this economy. So I think we’ve got a framework here that will do that.
KUDLOW: Senator Coburn, can we talk about some of the spending cuts? I mean, I mentioned the CLASS Act from Obamacare getting taken out. OK. You’ve got a lack of detail, that’s what I’m hearing from a lot of different people. You talk about a $500 billion down payment–I’m not sure what that means–four years of capping the budgets of the various departments and agencies–I’d like to hear you on that–and you defer Social Security. And I’m going to ask you if you’re going to defer Medicare. And I guess the summary question, Senator Coburn is, is are these cuts real? Can they be relied upon?
COBURN: Well, I, Larry, I don’t kid around very much. I think the cuts are real. There’s 500 billion in health care mandatory cuts in this. Some of it will be used to pay–to respond to the SGR, the physician payment area. I think that you can count on the cuts being real. That caps are real. There’s a new enforcement mechanism the Senate’s never had. You have to actually pass
a separate piece of legislation and it has to be passed with 67 votes to ever get around any of the caps. That’s going to be highly unlikely. And you’ve got to do it for every one time. So if you want to violate the cap in one–more than one area, you got to pass another piece of legislation. So you have to have a real good reason for ever violating the caps.
KUDLOW: Senator, let me just…
COBURN: And that’s been–that’s been the problem in the past is…
KUDLOW: I don’t mean to interrupt, but I just want to ask a–just a–what spending to GDP share would you have in this bill?
COBURN: What is the actual number?
KUDLOW: What are you targeting? As–are you targeting 25 percent…
COBURN: Well, well…
KUDLOW: …20 percent…
COBURN: No, no, no, no, no.
KUDLOW: …18 percent?
COBURN: Well, I–what I target is under 20 percent. That’s the only way we can get healthy again. And that’s why–I was going to say, based on your conversation with Senator Shaheen, this is a start. Everybody knows we have to start and that–we also know that $4 trillion doesn’t solve all the problems, but it starts us down the way to send the confidence to the international financial community that we understand our problem and we’re working on it there.
KUDLOW: All right. Well, you had a vote of confidence from the stock market today, no question about it. All right. It’s great to see you, Senator Coburn. Ms. Shaheen, thank you for coming on. We hope you’ll join us again…
SHAHEEN: Thank you.
KUDLOW: …in the future.
KUDLOW: Here now for an exclusive CNBC interview is Kentucky Republican Senator Rand Paul. He’s one of the co-sponsors of the GOP’s Cut, Cap, and Balance proposal.
Senator Paul, welcome back to the show. First of all, your take, Cut, Cap, and Balance, it will pass the House. Is there any hope it’ll go through the Senate? Any hope at all?
PAUL: You know, what I’m seeing is a huge amount of resolve. I just came from a big rally with grassroots groups, congressmen, senators. They’re excited about this, that we can actually tell the American people what we’re for and what would fix the country, really. I don’t think there’s much hope to fix our country unless we do something to balance our budget.
KUDLOW: Senator, let me ask you, if the Cut, Cap, and Balance is replaced or superseded politically by Senator Coburn’s new Gang of Six proposal, is that to your liking? Would you accept the Gang of Six proposal? Senator Paul? I don’t know. Have we lost him?
PAUL: I think we’ve got you back now. Sorry.
KUDLOW: All right.
PAUL: Sorry. We lost the audio for a minute.
KUDLOW: I beg your pardon, Senator, let me just quickly repeat. If Cut, Cap, and Balance is replaced politically by the Gang of Six, would the Gang of Six plan–we just had Senator Coburn on–would that be to your liking? Could you support the Gang of Six plan?
PAUL: Well, the first problem is there is no Gang of Six legislation. There’s a rough outline that I don’t think could possibly be a bill for a month, and they don’t even say that they are going to have legislation. So it’s really not even on the table. The only thing on the table is the Cut, Cap, and Balance. The other problem I have with the Gang of Six is it doesn’t balance. It never balances, and I think the people who elected us want us to balance the budget. I figure it’s a huge compromise for me to wait five to 10 years to balance a budget, and I can’t vote for any plan that never balances the budget.
KUDLOW: When does Cut, Cap, and Balance balance? That doesn’t come, I thought, until the 2030s.
PAUL: Well, no. Cut, Cap, and Balance will require that the budget be balanced within five years of passage of the amendment. And we estimate it might take a year or two to go through the states. So it’ll be about a seven year plan, and this is similar to Pat Toomey had a budget that balanced in seven or eight years. I have one that balances in five years. The Republican Study Committee had one seven to eight years. So it does have at least a finite time that says to the American people we will be working steadily on this road; but it also requires it by the Constitution, which I think is the only way we’ll ever reform things in Washington.
KUDLOW: Senator, you know, you are a tea party leader, you’re a fiscal conservative, obviously. I just want to ask you about the tea party piece. The main idea was to cut spending, you know, stop the growth of government and help grow the economy. You’ve been in office now, I don’t know, two years or so. What’s your take on this? How–are you succeeding? Is the tea party message influencing policy in Washington?
PAUL: Absolutely. I think we’re winning the debate every day in the public arena. We’re not yet winning the battle in the legislative arena, but we’re winning the public debate every day. Look at this Cut, Cap, and Balance. A couple of us–it started with two or three of us in the Senate about a month ago, everybody was opposed to it on both sides of the aisle.
Now we’re going to have a vote and everybody’s for it, at least on our side of the aisle. So we think we’ve come a long way and that we are influencing the debate. And really, we think that time is short. We’re worried about–you know, people say, `What happens if you default?’ We say, `What happens if you drive a country into bankruptcy?’ And we think that that’s around the corner. You know, even the ratings agencies are now saying just raising the debt ceiling doesn’t stave off a downgrade.
PAUL: You could get a downgrade if we don’t look like we’re serious about tackling our nation’s finances.
KUDLOW: Well, I think that’s a very important point. I just want to ask you right now, knowing what you know, can you forecast? Will we have a debt ceiling increase or will we have a default on our interest expense on the debt?
PAUL: Well, you know, I’m really optimistic that we’re going to force a showdown on this, and I think really what we need is a statesman. If the president were a true statesman, tonight he would say he’s going to take default off the table and that he will always pay the interest, as he should, on the debt. There’s plenty of money. We bring in 200 billion a month and our interest payment is usually about 20 billion. Plenty of money. They’re playing a game of chicken, and he needs to take the country’s future and say, `I’m not going to play a game with this. I will not default.’ He should do the same with the senior citizens. We have plenty of money for the Social Security. We bring in 200 billion a month, Social Security is somewhere between 50 and 70 billion a month. We have the money.
KUDLOW: Well, but the reality is those numbers–I mean, I agree with you on those specific items, but you’d also have to cut about 44 percent of the budget to make ends meet. I mean, those are what the numbers look like.
KUDLOW: It’s a very dicey proposition, is it not?
PAUL: Well, what you would have to do is you would have to balance your budget immediately until we passed a plan. And, you know, I’m pretty much a moderate, so I’m willing to not balance it immediately, but I would force them to balance it immediately for a couple of months until we had a plan in place or as soon as they’re ready to accept a plan. You know, if the president tomorrow comes to his senses and says, `You know what? We need to balance it in seven years and here’s the plan and I’ll stick by it.’ But this is a president that’s going to add more debt than all of the other presidents combined.
PAUL: This is a president who’s going to add 11 trillion to the debt. He’s out of touch and I think he needs to admit it.
KUDLOW: All right. We’ll leave it there. Senator Rand Paul, thank you very much for coming back on the program.
As uncertain and unruly and disheveled as the debt-ceiling debate may be, there are still good grounds to reach a deal. It could help the economy. It could keep the policy ball moving in the direction of smaller government. It could add a key business tax incentive for economic growth. And it could even stabilize the dollar.
There really are two problems here: First is raising the debt ceiling to avoid default. (That’s a real good idea.) Second is stuffing enough spending and deficit reduction into the deal to accommodate the newly militant demands of S&P and Moody’s, who want roughly $4 trillion in cuts over ten years in order to keep our AAA rating.
Sen. Mitch McConnell’s grand design may prove to be more powerful than people think.
As has been reported, McConnell is negotiating now with Sen. Harry Reid for a large-scale package that will allow the debt ceiling to rise unless overturned by a two-thirds vote. If a White House debt-ceiling deal comes through with $1.5 trillion of spending cuts, that will be part of the package. Right now, it’s not completed because enforceable spending caps have not been determined.
The key part of the new McConnell package is a joint committee to review entitlements in a massive deficit-reduction package. Unlike the Bowles-Simpson commission, this committee will be mandated to have a legislative outcome — an actual vote — that will occur early next year. No White House members. Evenly divided between Republicans and Democrats. No outsiders. This will be the first time such a study would have an expedited procedure mandated with no amendments permitted. Also, tax reform could be air-dropped into this committee’s report.
Senator McConnell is determined to produce something from this grand-design package. He’s a smart guy. He may be saving the GOP from itself. McConnell believes that debt default must be completely taken off the table. That’s the thinking behind his debt-ceiling proposal, unless overturned by two-thirds of a congressional vote.
He strongly believes that Republicans must disassociate themselves from any debt default or downgrade by the ratings agencies. And he recognizes that the monthly revenue and spending numbers are so unbalanced that the idea of revenue allocations in the event of no debt-ceiling hike is simply not feasible or desirable.
Other Republican sources are telling me they do not want to risk the destruction of the dollar as the world’s reserve currency by allowing a debt default or a downgrade. Eighty million checks have to go out. Otherwise the GOP could be blamed.
So one way or the other the tide is turning toward a deal. Credit McConnell’s uber-clever stratagem.
There are a lot of pieces to the debt-ceiling deal. There are the taxes upon taxes, as the Wall Street Journal editors describe it. That’s the roughly $1 trillion in new Obama taxes on top of what he’s already signed into law. It’s an economy and jobs killer.
Then there’s the entitlement piece, which may be more interesting since Obama is apparently open to extending the Social Security and Medicare retirement age and using the so-called chained-CPI, which would lower cost-of-living adjustments (and increase income-tax thresholds). Whether the president is serious about these entitlement measures, no one knows. It’s noteworthy that he’s at least talking about them, although he’s linking them to higher taxes.
But there’s another piece to the debt-ceiling deal that hasn’t yet seen the light of day. It’s the non-entitlement spending piece.
BACHMANN: Larry, it’s always a thrill to be on your show.
KUDLOW: All right.
BACHMANN: Thank you.
KUDLOW: All right. And thank you.
Listen, before we start talking about the debt ceiling and the economy and the lack of jobs, I want to ask you about a very odd attack your friend Governor Tim Pawlenty–I’m putting it up on the full screen, I want to give you a full chance to respond. He said it on one of the Sunday talk shows, he says, `Her record of accomplishment in Congress is nonexistent. It’s nonexistent. We’re not looking for folks who, you know, just have speech capabilities. We’re looking for people who can lead a large enterprise in a public setting and drive it to conclusion. I’ve done that. She hasn’t.’ That’s from Governor Tim Pawlenty from your home state. I want to get your reaction, please.
BACHMANN: Well, when I went into Washington, DC, I took the oath of office the same time that Nancy Pelosi took the gavel. Nancy Pelosi was not exactly interested, Larry, in my pro-growth policies of cutting spending and cutting taxes. But what I did is I stood up to her, I stood up to Barack Obama, and I worked tirelessly against the stimulus spending, against their no-growth in American energy policy. And I–my voice brought literally tens of thousands of Americans to Washington, DC, to do everything that we could to just beat Obamacare. People know that I mean what I say and I say what I mean, and I have actively fought at every level on these policies.
When I was in Minnesota serving in the state Senate and in Washington, DC, I did everything I could to defeat cap and trade. I didn’t work to implement cap and trade. I always worked very hard against the unconstitutional individual mandate in health care. I didn’t praise it. So there’s a very different record, and I think people appreciate my fight.
BACHMANN: And they know that I’ll do that in the White House.
KUDLOW: Yeah. No, with respect, I understand that. And the issues, that’s what’s propelling you. You just took the lead in a new poll in Iowa. You’re ahead of Romney now. Pawlenty’s way back at 9 percent. But I guess I’m just wondering, you and Pawlenty know each other many years. He says he campaigned for you. Is he attacking you because you pulled way ahead of him? Is that what’s going on here? Is this typical primary-type politics?
#more#BACHMANN: Well, I don’t know the thoughts and intentions of his heart. I only know that I have a very strong unparalleled record of standing up for the little guy and fighting against the big government politicos in Washington, DC. And that’s what I’ll do in the White House. We need a real American who’s a fair-minded, reasonable thinking person who–I was born in Iowa. We need someone like that in the White House to take those commonsense ideas, because, quite frankly, a lot of grandparents are worried about their grandkids, and they’re going to–if they’ll have the same opportunity. That’s what I want to do, take that fighting spirit to the White House.
KUDLOW: Do you think you have enough executive experience, which is another one of Pawlenty’s little snippets at you, that you’ve never run anything. He ran the state of Minnesota for two terms. I mean, that was a criticism leveled at Barack Obama. Do you think you have the executive experience?
BACHMANN: Well, my husband and I–I’m a federal tax litigation attorney. I have a post-doctorate degree in federal tax law from William & Mary. I’ve worked for years in the United States federal tax court. We’ve also started our successful company. I have executive experience in the real world in the private sector. It’s nice to have government experience. But, quite frankly, I think what’s more important is am I right on the issues and am I right on policies. Clearly President Obama has been wrong on the issues. And I think that’s what I would bring to the White House is a very healthy perspective of pro-growth policies to finally turn the economy around and create jobs again.
KUDLOW: You know, speaking of policies and the issues, your first TV ad, you say it’s time for tough love. You say the country is not going to fall apart without a debt ceiling increase, and you, yourself, are opposed to the debt ceiling increase. You’re very important because of your tea party roots, and a lot of people in Washington on the Republican side are taking their cues from you. Are there any conditions under which you might vote in favor of a debt ceiling? What would you propose if you had a magic wand?
BACHMANN: Well, what I would propose is dramatic cuts in government spending. We don’t see that from President Obama. Instead, today he said that small businesses need to eat their peas. In other words, he wants to have a trillion dollars in new taxes on small businesses, like the one I’m sitting in today, Larry. It’s Semtech. It’s a great company. It’s in Indianola, Iowa, but they’ve had to deal with tough love. They’ve lost half of their employees because of the very bad economy the construction industry is going through right now. It’s time for the federal government to have some tough love and tighten their belts and do some serious downsizing.
Until we see serious downsizing, until we see the repeal of Obamacare, at least the defunding of Obamacare, I don’t think we should be scared into thinking that we’ve got to continue to up the limit on the government’s credit card. Because, quite frankly, we can very easily make sure that we direct Tim Geithner, the Treasury secretary, to first pay off the interest on the debt, make sure our military men and women get paid for, and then deal with our priorities. Yes, we’d have very sacrificial consequences, but when are we going to get serious about deficit reduction? When are we going to get serious about not adding to the deficit? President Obama’s not there, but I am. I’m there, because it’s time that we think about the next generation and job growth in the United States.
KUDLOW: I want to get to job growth in a minute, after Friday’s dismal report. But just on the debt ceiling deal, there is talk about lowering cost of living for Medicare and Social Security, and there’s talk about a $500 billion cut in Medicare, presumably to hospitals, doctors, and other providers. Could you live with those entitlement cuts?
BACHMANN: I think President Obama was dangling those out there, and I think he has since pulled all of that off the table. I think that may have been part of a kabuki dance in Washington, DC, where it was some political maneuvering on his part. But, again, a lot of this is just more shadow boxing because with the president’s plan, he’s looking at all of these so-called cuts in years well beyond the beginning year. What he wants first of all, Larry, is to increase taxes on job providers, and then way off into the future, that’s when he’s looking at cuts. I think what the American people want to see from this president is that he recognizes, A, the failure of his own
economic policies, particularly the stimulus where his own economists say it costs us $278,000 per job that aren’t even lasting. They’re going away. It’s a complete failure, that’s why we have to change course.
KUDLOW: What’s your growth vision? Following from Friday’s terrible jobs report? And in particular, Ms. Bachmann, small businesses are not creating jobs, they’re actually losing jobs, as they’ve done for recent months, and in fact for this whole so-called recovery. What is stopping small business job creation and how would you get it into a true recovery?
BACHMANN: Well, it’s fairly simple. There’s complete uncertainty out here, and so companies like Semtech are sitting tight because they’re looking at every level. They hear the president this morning say he’s going to raise taxes, here’s a pro-growth policy. What we need to do first all is have the government announce that they’re going to dramatically scale back on spending, dramatically scale back. Number two, we need to cut the taxes on job creators. We have one of the highest corporate tax rates in the world. We need to take that down dramatically to being one of the lowest.
KUDLOW: How much should we cut it? How much–what kind of…
BACHMANN: Well, I would want to…
KUDLOW: What–are you a flat tax proponent or what’s your tax plan?
BACHMANN: I would love to see the corporate tax rate go from 34 percent down to 9 percent. I’d like to be the envy of the world on our corporate tax rate. I’d like to give zero out capital gains tax and zero out the dividends tax, zero out alternative minimum tax, and zero out the death tax. Because what we need to focus on is investment, productivity. And what we need to do is broaden the tax base. That’s part of the problem. Only 53 percent of Americans even pay any level of federal income taxes, 47 percent do not. We need to broaden the tax base because everyone benefits by having safety and security in our nation. And so everyone needs to pay something.
Second, we need to get rid of the overregulation. The biggest regulatory burden right now is Obamacare. I am committed to the full-scale repeal of Obamacare and to rolling back cap and trade. We need to very seriously look through the EPA and find out what works, find out what doesn’t, and get rid of what doesn’t work.
KUDLOW: All right. All right. I appreciate it very much. We’re flat out of time. Congresswoman Michele Bachmann, the new leader, according to a recent poll, in the Iowa Caucuses.
Here’s some friendly fiscal advice: Any time some Washington big shot like Ben Bernanke or Tim Geithner claims that immediate spending cuts in the debt deal will harm the economy — ignorethem. Completely. You know why? Because in this great country of ours, spending never goes down. Never.
Take a look at the following chart:
The blue line you see is President Obama’s budget. The green line is Rep. Paul Ryan’s budget.
Now, Ryan’s is of course a couple of trillion dollars lower than Obama’s over the next ten years. But what do they both have in common? They both go up. As in spending more, not less. As in, roughly $40 trillion to $45 trillion more. That’s a whole lot of taxpayer money, folks.
Now why is this? It’s because of something called the “current services baseline,” which includes population and inflation increases built into the budget. Entitlements have their own formulas.
So when you hear a politician tell you they’re cutting spending, they’re actually referring only to reducing the growth of spending. Rarely, if ever, do they actually reduce the level of spending.
Think of it this way: You’re out car shopping and thinking about buying a $100,000 Mercedes. That’s your target. But then you decide to forego the Mercedes and opt for a $20,000 Chevy instead. Well, guess what? Congress would score that as an $80,000 budget cut. Huh? We all know that it’s actually a $20,000 budget increase.
Let’s be honest here. This budgetary game remains one big taxpayer scam. Look, I used to work in the federal budget office. I know the game.
Here’s yet another scam: Big budget deals say they “cut” (there’s that word again) a couple of trillion dollars over ten years. But most of it is targeted for the last couple of years, as in years eight, nine, and ten. So basically it’ll never happen. It’s four or five Congresses from now. Laws change. Deals are broken.
At the end of the day, the only thing that really matters is next year’s budget. Will it be cut? Ever in my lifetime? Because if it were cut, it would bring that line in that chart above down. Now that would be a called a decline. All of that other stuff? Increases.
When businesses cut expenses, the spending line declines. But when government cuts spending, the spending line always rises. Think of it.
Huge bull week for stocks. The Dow was up nearly 6 percent, roughly 650 points. And it could be signaling a market forecast of a second-half economic rebound from the less-than 2 percent sputter in the first half.
Triggering this week’s rally, Greece default is off the table for now, Japanese auto production is picking up (so the supply-chain-shortage problem for the U.S. may ease), and the U.S. ISM manufacturing index slightly beat estimates (though the internal components were not fabulous).
On the downside, U.S. car sales for June were up only 11.5 million annually, private construction is still falling, and oil bounced back to $95 a barrel, despite the IEA and SPR release of stocks.
But gold looks weak, and maybe people are shifting cash out of commodities and into stocks. Bond prices got hammered this week, as yields rose to nearly 3.2 percent from 2.85 percent. That could be a signal of better economic-growth expectations.
Also noteworthy, after the Fed closes down QE2 — finally, thank heavens — the M2 money supply is picking up. That could be a growth signal for the second half. After hovering for nearly two years at around 4 percent growth, year-on-year M2 is moving above 5 percent while three-month growth is close to 7 percent annually. Maybe some of that $600 billion of new Fed money will actually be spent and loaned.
There are so many threats from Washington — with Obama’s relapse into tax-and-regulate class-warfare — that a roaring rebound in the economy still looks far-fetched. Maybe we can move to 2.5 or 3 percent growth. Maybe.
Final thought: The future economy may hinge on the dollar. With a somewhat less-accommodative Fed, maybe the greenback will stabilize and move higher, thereby cutting down the commodity inflation that has eaten away at the economy and consumers in the past six months.
As I wrote yesterday, Democrats are obsessed with repealing the Bush tax cuts, especially the upper-end. They could use a 12-Step program and a Higher Power.
President Obama, after signing an extension of the Bush tax cuts last December, relapsed once again at his news conference today. It was the usual bashing of millionaires and billionaires, oil companies, corporate jets (made by Cessna and Hawker-Beechcraft), and investment funds.
Plus, the president says there’s only about $1 trillion of spending cuts over ten years. Pardon me for being cynical for thinking much of that is phony baloney.
So the whole debt-ceiling business is going nowhere. Republicans correctly reject tax hikes and the president isn’t yet digging in on spending. There’s no majority in the House for a $600 billion tax hike, and I hope there never is.
What we have now is certainly not a growth package to perk up the sputtering, less-than 2 percent economy, with its 9.1 percent unemployment rate. No mention at all of a real business-tax-reform overhaul.
On the plus side, the president did seem to side with Boeing in the NLRB dispute about adding jobs in South Carolina and the state of Washington. Obama said companies should be able to relocate anywhere in the United States.
But basically his message today was class-warfare, soak-the-rich. Somehow, Democrats are for your kids but Republicans are for your fat cats. It’s so tiresome. It will never sell.
Here’s a question: Why is repealing the Bush tax cuts such a constant obsession for the Democratic party? Especially the top rates for the most successful earners and small-business entrepreneurs?
It seems this is the Democratic answer for every single issue, every problem, every debate.
This, of course, saddens me enormously.
And so, always ready to help, I am recommending a 12-Step program to help the Democrats overcome their anger, resentment, and obsession over the Bush tax cuts. Democrats really need a Higher Power on this.
First, when tax rates were lowered across-the-board in mid-2003, the incentive effect kicked in to jump-start the economy immediately. Over the next four-and-a-half years, before the financial meltdown slammed the economy (and that was a credit event, not a fiscal one) 8.2 million jobs were created.
Jobs essentially rose for about 50 consecutive months. Non-farm payrolls rose from just under 130 million to just over 138 million.
Don’t believe me? You can look it up. This sort of job creation is exactly what President Obama would love to see happen now.
And while jobs rose, the government took in more revenues. As a share of GDP, revenues rose from 16.2 percent to 18.5 percent. Simply put, supply-side tax cuts were the single-best economic policy President Bush implemented.
Elsewhere, President Bush overspent and overregulated. And yes, the dollar collapsed on his watch. And from Fannie Mae to the Federal Reserve, the housing bubble was born.
But the tax cuts? They worked. And that’s my point.
Rising Senate star Marco Rubio of Florida put out a strong growth message in our interview last night. Shrink the size of government; broad-based flat-tax reform; roll back regulations; balanced-budget amendment with tough spending caps. And the best solution for an ailing middle class: Create jobs. He believes the 21st Century can be an American century if we follow this path. There are few people more articulate than the gifted Senator Rubio.
Here’s the transcript:
LARRY KUDLOW: We welcome back Senator Marco Rubio of Florida to The Kudlow Report. It’s been a while, Senator, thank you.
SEN. MARCO RUBIO: Yeah, thank you. Thanks for having me.
KUDLOW: All right. Well, it’s great to have you as a senator. I appreciate it very much.
All right, the debt talks are very hot. President Obama’s involving himself now. He’s meeting with the senators. I want to ask you, over the weekend, the president said we can’t simply cut our way to prosperity. What does he mean by that and what’s he signaling in terms of these debt talks?
RUBIO: Well, I’m not sure what he means by that. I can tell you that we can’t cut our–only our way out of prosperity. We need to grow our way into prosperity, and that means economic growth. And government can be a facilitator of that in creating an environment where job creators are incentivized to create jobs. Job creators are not governments, they’re not presidents, they’re not US senators. Job creators are everyday people from all walks of life that start a business or expand an existing business, and what we need are government policies that make it easier for them to do that and that encourage them to do that. So if that’s what the president means, I think that’s very good.
If on the other hand what he means is we’re going to borrow a bunch more money and spend a lot more money to try to do what he tried to do with the stimulus, I think that’s very bad news for our future.
#more#KUDLOW: I mean, he has his high-speed trains. He’s got his infrastructure. He’s got his clean energy technology and so forth. And I want to also put in, Vice President Biden over the weekend at a Democratic event said we can’t have the middle class place–have all the burden of this deficit reduction and debt. And then he singled out hedge funds who have a 15 percent capital gains tax rate for their income. I guess my question is, what is Mr. Biden saying along with the president? Are we looking at a significant tax increase as part of this debt ceiling?
RUBIO: Well, I think clearly many in the Democratic base have said that they want that on the table. Unfortunately for them, and I think fortunately for the country, I don’t think there’s going to be support for that in Washington, including among many Democrats, I hope, who realize that we can’t…
KUDLOW: No tax increases. The Democrats won’t take a tax…
RUBIO: Well, there can’t be a tax–well, I think some Democrats want there to be a tax increase, but I think ultimately the votes are not there, certainly in the Senate, I hope, because–I could be wrong, but I know among Republicans the votes aren’t there. Because, number one, there’s no way you can tax your way to prosperity. Number two, our tax code is already a source of great uncertainty and worry and concern about the future. And number three, even if he wanted to, which I do not, there’s no tax they could raise that would accomplish the deficit reduction they’re talking about. I mean, if you raise to 100 percent the taxes on every rich American under their definition of rich, which is people making over $250,000 or more a year, it still wouldn’t make a dent on the debt.
So, look, we’ve got to–we need a combination of two things. We need fiscal restraint. We need a government that begins to stop spending money it doesn’t have. And we need pro-growth strategies. We have to grow this economy. There’s not enough focus on the growth element of this.
KUDLOW: What about the issue of deductions, tax deductions? Now there’s a lot of talk, even by some Republicans in the Senate, that they could take some downward adjustment or elimination of certain deductions as part of a compromise package. Does that work for you?
RUBIO: Well, I think we’re in need of tax reform to make the tax code simpler and easier to comply with and more certain. I don’t think it’s a source of revenue, and that’s why I believe in the revenue neutrality in any of those measures that are taken. Again, I think if you want more revenue for government, the way you do that is by growing your economy, not by raising tax rates on certain people or getting rid of deductions. So if they want to make the tax code flatter and fairer, that’s fine. But if they–and I think that’s a good idea. But if they want to use it as a way to raise revenue–in essence, if it’s not going to be revenue neutral, I think that hurts economic growth, which has to be our number one priority.
KUDLOW: How do you react to what Mr. Biden is saying regarding the middle class? I mean, I guess the point is, the middle class rely on Social Security to a large part. They certainly rely on Medicare. At least Medicare is on the chopping block in these debt talks. Cutting Medicare back, what do you give the middle class in return? They’ve sort of taken it on the chin. You know this. Oil prices, gasoline prices.
KUDLOW: Wages are not keeping up with inflation. What is your message? What is the Republican message to the middle class?
RUBIO: Well, a couple of things. Number one, on oil prices, we have no one to blame but the government for a lot of that. And quite frankly, this administration has made it harder, not easier for Americans to produce their own energy. And it’s contributed greatly to the price of oil and to the price of–at the gas pump.
As far as Medicare and Social Security are concerned, let’s focus on Medicare for a moment because I think that’s an important one. It’s going to bankrupt and it has to be saved. I want to save Medicare. The status quo doesn’t save Medicare. The status quo bankrupts it. So there are a lot of people out there criticizing Paul Ryan’s plan. I would say to them, `Well, what’s your plan?’ Where is the president’s plan to save Medicare? Where’s the congressional Democrats’ plan to save Medicare. Where’s the Senate Democrats’ plan to save Medicare? They don’t have a plan to save Medicare. Their plan is to use it as a electoral weapon in the next election. So what I–my message would be very simple. If we keep doing the things that we’re doing now with Medicare, it will go bankrupt very soon. It won’t exist when I retire or when my child retire and it’ll lead to bankrupting this country. So I think–I am for reforms that save Medicare and keep it solvent.
KUDLOW: And do you think that there’s a middle class problem there inside that message for the Republican Party? Because I think it is true, in part, in part, that the kinds of reductions envisioned by Paul Ryan, let’s say, will clip down some of the middle class benefits. Now maybe all people’s benefits, but the middle class will share in that.
RUBIO: But the most important thing for middle class and working class folks in this country is jobs. They want to be able to go out and earn a livable wage so they can raise their family with and leave their children better off than themselves. And my argument is that what’s done that in America has not been our government. Certainly government can create an environment where that’s possible, but what’s done that in America is the job creators. And what we need is an environment of certainty when it comes to regulations, of certainty when it comes to our tax code. We don’t need leaders that are out there using rhetoric that discourages job creators from investing in America so the jobs return to the United States and are here again, so that middle class families can feed their families, raise their children and provide them opportunities they themselves didn’t have.
KUDLOW: What will it take to get you to vote for a debt ceiling compromise?
RUBIO: Well, I–you know what? I outlined it in the Wall Street op-ed I wrote over two and a half months ago. I don’t–this debt limit debate shouldn’t be just about the debt limit. It should be a comprehensive opportunity to deal with the issues that confront our nations economically. So I want some sort of regulatory reform. I want some sort of tax reform. I’d like to see us tackle or at least begin to tackle how to save Medicare and Social Security, or at least Medicare in the starting. I’d like us to see a balanced budget amendment. I’d like to see a spending cap. So these are the kinds of things I’d like to see in a package. I have said from the beginning that this debt limit debate is a golden opportunity to begin to confront the serious issues that stand between us and the next American century, which is what we have an opportunity to build here.
KUDLOW: Speaking of which, the next American century–really my last question, In in your excellent maiden speech on the floor of the Senate, I guess about 10 days ago, you say people aren’t the problem in America. It’s the government that’s broken. Could you just briefly tell us what you had in mind there.
RUBIO: There’s nothing wrong–yeah, there’s nothing wrong with the American people. Americans haven’t forgotten how to create jobs. Americans haven’t run out of good ideas. But we do have a broken government that through tax policies and regulatory policy and all the uncertainty they’re creating, are standing in the way. If only our government could do a few of these things right, the American people will give us here–the new American–the 21st century will also be the American century.
KUDLOW: You worry about decline a lot, but are you in your heart an optimist that we can solve these problems?
RUBIO: I am. I am. Because we have the greatest thing–we have the greatest people on Earth. All we need is a government that does its job. And if we have that, the 21st century will be greater than the 20th for us. And that’s–I know that’s hard to imagine, but that’s the opportunity before us.
KUDLOW: Sen. Marco Rubio from the great state of Florida, thank you very much for joining us on The Kudlow Report.
Here’s the latest mini-documentary from my old friend Dan Mitchell over at the Cato Institute.
According to Dan:
The Medicaid program imposes high costs while generating poor results. This Center for Freedom and Prosperity Foundation video explains how block grants, such as the one proposed by Congressman Paul Ryan, will save money and improve healthcare by giving states the freedom to innovate and compete.
Did the International Energy Agency (IEA) just deliver the oil equivalent of QE3?
The decision to release two million barrels per day of emergency oil reserves — with the U.S. covering half from its strategic petroleum reserve — is surely aimed at the sputtering economies of the U.S. and Europe following an onslaught of bad economic statistics and forecasts. This includes a gloomy Fed forecast that Ben Bernanke unveiled less than 24 hours before the energy news hit the tape.
The Wal-Mart victory handed down by the Supremes today is a great win for all business, and a huge defeat for frivolous class-action lawsuits.
In fact, this business victory by Wal-Mart is so bullish, I believe it drove up stocks today, with the Dow finishing 76 points higher. There was no new news from Greece. Today’s stock market rally was the Wal-Mart effect.
By the way, the slam-down on class-action lawsuits is also a victory for individuals. If people have a beef, go ahead and sue. But the Supremes just said no to sociological or cultural or general statistical models, which provide no evidence in these cases. No proof.
Literally, the class-action slam-down by the Supreme Court will save business billions and billions of dollars over time. And of course, the liberal left has waged war against Wal-Mart for years. So that gang took it on the chin today.
And then there’s my friend Nancy Pelosi. She said today’s Wal-Mart decision “sets back the cause of equality for women.” She went on to re-endorse various equal-pay bills, such as the Lilly Ledbetter Fair Pay Act and the Paycheck Fairness Act. You gotta love it.
After the dreadful NLRB lawsuit against Boeing’s freedom to choose — which is part of the war against business coming out of Washington — today’s Wal-Mart decision is welcome relief.
Coming up this Wednesday, the Fed’s policy committee will meet, and Fed head Ben Bernanke will host his second public press conference. It is my great hope that Mr. Bernanke will make it clear that 1) QE2 is ending in two weeks, on schedule, and 2) there will be no QE3.
In other words, send a clear signal to financial markets that the central bank is moving away from quantitative easing to quantitative neutral.
Why am I so keen on this? Because I think it will bolster the dollar. And that, in turn, will hold down energy and other commodity prices. And that, in turn, could give us a lower inflation rate in the second half of the year.
Now that would be bullish for economic growth.
What has caused the current economic-growth sputter? Principally, exploding oil, gasoline, food, and other commodity prices from a falling dollar caused by too much money created by the Fed.
Inflation remains the cruelest tax of all. And it has depressed real consumer incomes and slowed down business. If King Dollar recovers, the sputter could turn into real growth. And bullish stocks will pick this up quickly.
In other words, the second half outlook hinges on the dollar. Hopefully the Bernanke Fed will stand behind the greenback. No more money printing.
New economic stats today on retail sales from both China and the U.S. show there’s no double-dip recession out there — no matter what the bears-gone-viral may be telling you. No Armageddon. And no stock market crash either. Actually, today’s 123-point Dow gain to get back over 12,000 is a key sign that the stock correction may be over.
Forward earnings at $96 a share on the S&P 500 (1,288) show a price-earnings multiple of about 13.4-times. Trailing earnings of $94 a share show a similar multiple. So stocks have decent value. Stocks also have an attractive 7.25 percent earnings yield, compared to 3.1 percent on 10-year Treasuries and 5.7 percent on investment-grade corporate bonds.
I’m not a roaring bull. But I am more positive than I was two months ago when I first started talking correction.
The Fed is still accommodative. The yield curve is positively sloped. And the oil-price shock looks to have peaked at around $100. All those are positives. Perhaps as QE2 pump-priming ends in a couple of weeks we will see a somewhat stronger dollar and a weaker oil price.
But the good news today is that retail sales in the U.S. came in better than expected. They actually increased slightly, by three-tenths of a percent, excluding the auto sector which has been hard hit by Japanese supply shortages. Core retail sales excluding autos, gas, and building materials increased two-tenths of a percent and are up 6.1 percent over the past year.
We’re in a muddle-through economy. It’s not the Reagan ’80s. But it’s also not the Carter ’70s.
In China, where the data is just about as important to the U.S. as the U.S. data, May retail sales rose 16.9 percent year on year, or slightly less than the 17.1 percent registered in April.
Meanwhile, industrial production in China rose 13.3 percent for the year ending in May, just a tad less than the 13.4 percent registered in April. These are solid numbers. They’re off their peaks. But it’s not a collapse. China’s going to keep on growing. There is no meltdown.
And the Bank of China raised bank reserve requirements again, a response to the 5.3 percent CPI for May — which is an inflation warning to both China and the United States.
Ben Bernanke should quit yapping about a clean debt bill for more Treasury borrowing authority without serious spending reductions. No fiscal confidence will return unless measures are taken now to curb out-of-control spending and borrowing.
People in the bond market are not stupid. For several months they have known that the debt-ceiling talks would be hardball negotiations and will go down to the wire. But 10-year Treasury yields have plunged from just under 4 percent to around 3 percent. The market knows there will be no default. A deal will be made. But it has to be a spending-control deal if anyone is to ever believe that the U.S. is serious about its financial plight.
And for my money, any deal should include a pro-growth component, like a 15 percent business tax rate that also abolishes all deductions.
Former Minnesota governor Tim Pawlenty turned out a blockbuster economic-growth plan this past week, including deep cuts in taxes, spending, and regulations. It’s really the first Reaganesque supply-side growth plan from any of the GOP presidential contenders. And he caps it all off with a defense of optimism as he charges ahead with a national economic growth goal of 5 percent.
That’s right: 5 percent.
Pawlenty calls this target aspirational. Okay, fine. But deeper down, he’s basically saying no to the declinists and pessimists who seem to populate the economic landscape these days. Big government doesn’t work. Let’s try something different.
Last night I spoke with former Minnesota governor Tim Pawlenty about his blockbuster, Reaganesque, pro-growth economic plan. He wants to slash taxes, spending, and regulations. He blasted the cheap-dollar policies of the Bernanke Fed and said he would never reappoint him. He also told me that if you can Google a government service or asset, it should be sold. Think Amtrak and the U.S. Post Office. The Pawlenty plan is by far the most detailed economic prescription from any Republican candidate thus far. The former college hockey player caps it all off with a 5 percent aspirational growth target designed to lift the spirit of America:
KUDLOW: All right, topic A tonight, it’s the economy, stupid, and that’s going to decide the fate of the 2012 presidential race. Today in a speech at the University of Chicago, former Minnesota Governor Tim Pawlenty unveiled a blockbuster growth plan that cuts taxes, spending and regulations. Joining us now for a first on CNBC interview is former Minnesota Republican Governor Tim Pawlenty.
Governor, welcome back. Before we start, please take a listen to what President Obama had to say today about worries of a double-dip recession.
OBAMA: I’m not concerned about a double-dip recession. I am concerned about the fact that the recovery that we’re on is not producing jobs as quickly as I want it to happen. Prior to this month, we have seen three months of very robust job growth in the private sector and so we were very encouraged by that. This month you still saw job growth in the private sector but it had slowed down. We don’t yet know whether this is a one month episode or a longer trend. Obviously we’re experiencing some head winds.
KUDLOW: All right, there’s a real mouthful. Governor Pawlenty, do you see a double-dip recession? Do you agree with what President Obama just sort of basically said?
PAWLENTY: Well, the economy’s sputtering. And, you know, he declared last year in his administration the recovery summer, Larry, you remember that? How was your recovery summer?
KUDLOW: It was excellent.
PAWLENTY: Yeah? Did you use sunscreen? Did you use the appropriate SPF during the recovery?
#more#KUDLOW: All right, Governor, well put.
PAWLENTY: All right. Well…
KUDLOW: But you–I take it you don’t see a double-dip recession. Is that your basic view?
PAWLENTY: Well, I’m concerned about the near term and intermediate term outlook for the economy. I think they’ve done a number of things that set us up, if not for a double dip at least a lot more bumps in the road. This is not over yet in terms of the challenges the country faces. We have to throw off the shackles of Obama’s declinist attitude and policies and get back on a pro-growth, positive, optimistic agenda. That’s what we did today at the University of Chicago. And, Larry, the marquee part of it is to say, look, we’re going to set a goal of 5 percent for growth in this country. We’re not going to accept the CBO, you know, 2 percent, anemic outlook for the country. We’re going to double that and more, and we’re going to talk about the specific policies to unleash the American entrepreneurial spirit.
KUDLOW: Well, I think the 5 percent growth goal is terrific stuff, but I want to ask you about another major figure who doesn’t see 5 percent growth. That being Ben Bernanke, who also gave a big speech today, Governor. Bernanke says the economic sputter is temporary, but he’s not worried about the dollar and he is going to keep Fed policy at a zero interest rate for as far as the eye can see. Let me ask you, sir, A, do you agree with Bernanke’s assessment that the sputter is temporary? And, B, would a President Pawlenty reappoint Ben Bernanke?
PAWLENTY: Well, as to the last point, Larry, I opposed his appointment last time, so it wouldn’t be hard for me to oppose his reappointment next time. And I would–don’t think that he should continue in that position. A strong dollar reflects a strong country and a strong economy, and we need to make sure that we get the–stop the practice of devaluing the dollar. Americans get paid in dollars. They buy groceries in dollars. Their 401(k)s are in dollars. And when you devalue the dollar, you’re devaluing the net value of this country and it’s a hidden tax on all Americans, and it’s going to get worse. They have flooded the money–excuse me, flooded the market with these dollars that they’re printing in the basement, as you know, and it’s devaluing the dollar. They don’t have a strong dollar policy. And it makes me wonder, Larry, if they’re even doing it intentionally. I wonder if part of their plan isn’t to purposely try to inflate their way out of this deficit. I hope that’s not true, but we have to return to a strong dollar policy.
KUDLOW: All right, a strong dollar. Let’s turn to your better deal speech today. First of all, 5 percent economic growth, a laudable, notable target. Is it credible, sir? Can the United States get a 5 percent growth rate?
PAWLENTY: Of course, and it has. And we got two examples in recent history from this country. One in the ’80s under President Reagan. One under President Clinton and the Democratic controlled Congress in the ’90s. We had nearly 5 percent growth rate in each of those decades. We can do it again for sure.
KUDLOW: All right. You’ve got what I would call a blockbuster tax cutting growth plan. I want you to walk through it briefly, if you will. First on the business side you’ve got a thorough going reform.
PAWLENTY: Yeah. It’s–a 35 percent rate at the corporate level now would be taken down to 15 percent, and then we’d clean out most of the crony capitalism in the form of the deductions, credits and exemptions and underlie that with just one or two exceptions, Larry. And then on the individual side, only two rates. Take the six current rates but collapse them down to two, 10 percent and 25 percent. The 25 percent rate would kick in at $100,000 of income. We’d keep the exemptions, deductions and credits under that. And small business owners in the pass-through entities, the LLCs, the Subchapter S and the like, they could choose which system they want to be in. They’d have a choice to toggle back and forth.
And then we also talked about what it’s going to take to get down the spending. So we’ve got a goal of 5 percent. A huge pro-growth tax plan, and then we also have a serious set of proposals to reduce spending and get the budget
KUDLOW: By the way, just to clarify. You do want to eliminate tax rates on capital gains, interest income, dividends and estates, is that correct?
PAWLENTY: Yeah, that’s correct. And that’s another huge part of the tax cuts, as well.
KUDLOW: All right. Let me go to the spending. You got a 5 percent spending impoundment for year, but it looks a little thin. There’s not a lot of detail in the spending side. By the way, Ben Bernanke told you today–I don’t know if he was addressing you personally–but he said this is not the right time to cut spending because it might upset the economy. There he goes again, you vs. Ben Bernanke. Now, first, is this the right time to cut spending? And second, what about your spending plan? Do we need more details there?
PAWLENTY: Well, the best time to cut spending would have been in the past and now we–is we have to do it, Larry. Should have done it before now. And, of course, we have to cut spending. We’re–the thing is out of control. They’re spending 40 cents of every dollar they spend is a deficit or debt dollar or so. So let’s do this, let’s be specific, let’s put no sacred cows to the side. Let’s put them put them up on the table. We got to reform the entitlement program, so we’ve got a specific set of proposals on Social Security, including gradually raising the retirement age for new people into the work force. Means testing part of Social Security. So if you’re wealthy, you won’t get your COLA in the future. We’ve got similar proposals for Medicaid and Medicare. I went to Iowa, told the truth to people there and said we can’t afford the ethanol subsidies and we also should get rid of all the other subsidies. I went to Wall Street and told them to get their snout out of the trough. We’re not going to do any more bailouts or carveouts or handouts there. We had a similar message for the public employees and the public employee unions and then down the list. But this is going to be the Jack Nicholson election from the movie “A Few Good Men.” He said famously when he was on the witness stand, “You can’t handle the truth.” Well, this is a going to be a referendum on whether the American people can handle the truth.
PAWLENTY: And we’re going to tell it to them and they can handle it.
KUDLOW: All right. But your critics are already out there today saying your broad-based tax cuts are going to blow up the budget deficit, and you don’t have the spending cuts to go along with that. What’s your reaction to that? You know how they’re going to hammer you. In fact, some Republicans are already expressing skepticism about your plan, much less the Democratic National Committee. What’s your response to that?
PAWLENTY: Well, my response to it is our plan, over a 10 year period, not only balances the budget but can leave you in the black. And if you had–reduced the federal spending by even 1 percent a year from today’s level over the next six years, you balance the budget in six years. But you add to that our tax cuts and the growth model and the spending cuts and the net of it, dynamically scored over the next 10 years, is the budget’s balanced and it leaves a surplus.
KUDLOW: So you’re saying growth is essentially to spending and deficit and borrowing restraint? Is that your message?
PAWLENTY: Well, growth is essential, first of all, to a successful country and opportunity for our citizens, but you can’t get to where we need to be without dramatically increasing growth. And President Obama’s policies don’t get it done. He doesn’t even have a plan. He won’t even address this= issues. I have a plan, we put it on the table and we got more to come in the coming months.
KUDLOW: What do you–where are you on the Paul Ryan Medicare plan?
PAWLENTY: Well, we’re going to have our own plan, Larry, and it’s going go be coming out shortly. It’s going to have some of the similar features, but it’s going to have its own features. We’re going to start paying for performance. So providers, hospitals, doctors and clinics won’t get paid just for volume. They’ll get paid for better results and better outcomes, and then we’ll leave Medicare as a choice, but it’ll be a choice that’ll be competing against a number of other choices, as well.
KUDLOW: Where are you on Mitt Romney’s stubborn adherence to government mandates for individuals and businesses in the state of Massachusetts, presumably any other states? What’s your take on Romneycare?
PAWLENTY: I’m one of the parties in the Florida lawsuit to have the individual mandate declared unconstitutional. It’s an issue that was presented to me formally several times when I was governor. I rejected it every time. And we took a different approach in Minnesota. We want market-based, consumer-based reforms in health care. We want to give people incentives to make wise choices in a marketplace, not centralized choices and have government mandates and takeovers.
KUDLOW: What’s your Google test? You’ve got this very interesting part about the Google test and you want to sell off a bunch of assets. Can you quickly tell us about the Google test in the Pawlenty plan?
PAWLENTY: Sure. The premise it, look, if you can go on Google and find a service or a product that’s available in the private sector, then government probably shouldn’t be producing or providing the product. Now obviously you have to apply a common sense and responsible lawyer of review on this. But, you know, do we–when you’ve got FedEx, how much longer do you need the post office, at least as a government entity? Do we really need all of Amtrak to be public? No, you don’t. I think the private entities could operate that. I don’t think you need the government printing offices and on down the list. But there are series of services that the government provides that I think you can have them compete or outsource it to the private sector.
KUDLOW: Do you really–you really want to sell off the “snail mail” post office? That’s in your speech. Do you really want to privatize the post office?
PAWLENTY: Yeah. I think that would be a great idea. And I also think privatizing Fannie and Freddie would be a great idea. They’re the culprits–one of the main culprits to the housing collapse and our economic crisis, and they got off scot-free in the abysmal Dodd-Frank reform.
KUDLOW: So if you sell off, all right, Fannie, Freddie, the government printing offices, you sell off Amtrak, you sell off the post office–I don’t think anybody else is talking about this–how much money would you raise? How much money would that go towards debt reduction, let’s say?
PAWLENTY: Well, there’d be some. Look, the truth of the matter is, Larry, if you want to look where the big money is for debt reduction in the future, it’s in entitlements, as you know, and it’s in defense spending. So you can add up all the Department of Agriculture, Amtrak, the post office, Department of Commerce, and will it help at the margins? Yes. But is it going to fundamentally solve the problem? No. The only way to do that is to reform entitlement spending.
KUDLOW: But you talk about a 5 percent budget impoundment as your spending plan. And as I said it, I understand about ethanol and so forth, but it isn’t all that specific. Are you talking about across the board, 5 percent spending cuts, including entitlements and defense? Is that your spending plan?
PAWLENTY: The proposal on that is as a last resort. We have a number of things that would precede that. First of all, pass a balanced budget amendment. Two, put specific spending caps into law as a percentage of GDP around the historic average of around 18 percent. And then, three, we can’t count on Congress doing what you and I have been talking about, so we have to have a fail-safe, last-resort measure. And what we’ve proposed is to give the president the emergency and temporary authority to impound up to 5 percent of any and all spending to his or her choosing until such time that the budget is balanced. Now I had a power like that when I was governor of Minnesota. It was called unallotment, and I used it. I unallotted more spending in my state in my eight years than all the previous governors combined in their 142 years combined.
KUDLOW: All right. So with this big speech, you’re basically taking a Reagan supply side economic growth approach to fiscal policy and the economy. Governor Romney is also laserlike on the economy in his announcement last week. He says because he was a successful businessman, he’s the most qualified Republican candidate to resurrect jobs and economic growth. You have a resume as a successful politician but not as a businessman. What’s your reaction to Governor Romney who says only a business guy can solve our problems and get us back to prosperity?
PAWLENTY: Well, two things. I travel the country every day and I talk to business leaders and they basically say the same thing, Larry, `Get the government off my back’ as it relates it taxes, permitting regulation, insurance and the like, litigation. And so I don’t want to say it’s easy but it’s not rocket science as to the things that we need to do to get this economy going. We know the answers. The question really is do you have the fortitude to actually do it? And I’ll put my record up as governor, A rating from the Cato Institute on these matters. I think it’s one of the best in the country. And, you know, when you–everybody talks about their records, whether it be private or public…
PAWLENTY: …there’s some good things and then there’s also some bad things. So we all got to account for our records.
KUDLOW: All right. Governor Tim Pawlenty, great speech today. Great stuff. Powerful stuff. The incentive model of growth. Thank you for coming back on the show. All the best on the campaign trail, sir.
Here’s the latest from my friend and frequent Kudlow Report guest Dan Mitchell. According to Dan:
Even though it violates existing law, the IRS is seeking to impose a regulation that will discourage foreign investment in the U.S. economy and undermine the competitiveness of American banks. This CF&P Foundation video provides five reasons why this proposal is misguided, including the risk to innocent people living under corrupt and tyrannical governments.