Kudlow’s Money Politics

Smoke and Fire

Beware the truth of the old adage, where there’s smoke there’s fire.

Still more articles out this morning on the potential threat President Bush will sign on to a high tax Social Security deal. Also, an Alternative Minimum Tax (AMT) repeal deal that would require big tax hikes elsewhere as a pay-go offset.

Bob Novak writes about the payroll tax threat, while Grover Norquist writes about the AMT threat.

Inside the White House, there’s apparently a split with Karl Rove, Al Hubbard and Ed Lazear, who oppose any tax hike deals, and Treasury man Henry Paulson and Josh Bolten who are apparently pursuing such deals.

Over the past couple of months, numerous supply-siders like myself and many others have wondered out loud about these anti-growth, tax threat deals. The President’s op-ed piece in last week’s Wall Street Journal suggests that he won’t do it ‘” but no one really knows for sure.

He keeps saying that all options are on the table regarding Social Security reform. This is not a comforting phrase. Are we talking about a small kitchen table? Or are we talking about a super large antique Louis Quinze majestic dining room table?

Today’s New York Times has a classic, class warfare argument from a Congressional Budget Office analysis from 2004 tax data that purports to show ‘Bush Tax Cuts Offer Most for Very Rich’ but actually shows that the top 1 percent of income earners paid about 37 percent of all federal income taxes’”a big jump from prior years. (Meanwhile, families in the bottom 40 percent typically paid no federal income tax and received money back from Uncle Sam.)

On CBS’s Face the Nation yesterday, Ms. Pelosi mentioned raising taxes on people earning over $500,000 yearly as a ‘last resort.’ So, tax-the-rich remains very much alive and well in the first 100 hours of the new Democratic Congress. (Democrats apparently want a new direction for U.S. economic policy, despite the fact that Friday’s jobs report once again showed our low tax rate economy is doing very well, thank you very much.)

Democrats took two concrete steps last week to promote this tax hike threat. First, they passed pay-go, which means spending increases could be financed by higher taxes. Second, they abolished a two-thirds super majority requirement for tax hikes and substituted a simple (read ‘party line’) majority instead.

I believe these actions rattled the stock market on Friday, despite the good economic news.

On the bright side, Republican Senate Leader Mitch McConnell told Fox News yesterday that the votes aren’t there for tax hikes. I sure hope he’s right.

But where there’s smoke, there’s very often fire.

Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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