Needed: A Democratic Tax Cutter Jude Wanniski June 19, 2002

Memo To: Democratic Presidential Hopefuls
From: Jude Wanniski
Re: How to Win in 2004

One of the reasons we sometimes refer to the Republican Party as "the Stupid Party" is that when it uses the process of trial and error in designing policy, it almost always chooses the "error." For generations Republicans tried to persuade the voters that they should vote for "fiscal responsibility," i.e., tax increases. No matter how many times they failed, they simply doubled their bets. You're all too young to remember, but Barry Goldwater's 1964 campaign featured ATTACKS on the Kennedy tax cuts that passed that year, tax cuts which brought the top income-tax rate to 70% from 91%. If that was not bad enough, Richard Nixon INCREASED the capital gains tax in 1969, and when the economy blew up, he turned to his Keynesian and monetarist advisors and they told him to get off the gold standard, as it was the Federal Reserve that was holding back the economy. So he raised tax rates explicitly and through inflationary bracket creep, which was the real reason he had to resign in disgrace!

It was not until Ronald Reagan, a Democratic expatriate, ran as a supply-sider in 1980, promising to repeat the Kennedy tax cuts, that Republicans finally had a winner. The tax cuts were actually designed by supply-siders with the idea that they would produce a bigger economy by lowering rates that were discouraging economic production and exchange. This was the same theory that JFK used, by the way, as he was using classical ideas on taxation, not the Keynesian variety. I bet you didn't know that!! A bigger economy at the lower tax rates would produce the same level of revenue, which is what happened. The idea was not to starve the government of revenue, although some GOP economists believed that would happen and relished the idea. As I was among those who designed the Reagan economic platform, which embraced the Kemp-Roth tax cuts, I can assure you we knew that you should not cut tax rates that were not excessive, or you would lose revenue and have to make up for it with lower spending or higher interest rates on increased borrowing. By only cutting tax rates that were too high, revenues would at least increase enough to cover any borrowing costs, so everyone would come out ahead.

As you contemplate a run for the White House in 2004 against President Bush, you should think of your economic platforms in these same terms. I note that Senate Majority Leader Tom Daschle, who may be in your group of hopefuls, has announced TOTAL opposition to any tax cuts in the foreseeable future. This makes him as fiscally responsible as Barry Goldwater in 1964! The correct position to take is to advocate only supply-side tax cuts that will clearly pay for themselves. You can, for example, cut the capital gains tax to zero and it will pay for itself, because it is a tax on a successful investment of after-tax income. It explicitly taxes successful risk-taking and is a dead weight around the economy. Ask your compatriot, Sen. Bob Torricelli, and he will tell you how popular it is to back lower capital gains tax rates, as he easily won his Senate seat by breaking ranks with your party. Torricelli is now back in the fold, opposing the Bush tax cuts, but he is on fairly solid ground as the Bush tax cuts have been poorly designed. I liked his line: "When I joined the Democratic Party, nobody told me I had to oppose tax cuts."

If you develop a Kennedy-like approach to tax policy, you will be able to outflank President Bush, who has consistently opposed the one tax cut that would do the most good for the economy. He does this not because he is stupid, but because he chose his economists from the same pool his father did, when he was President. It is a major weakness in the Bush program that you would not see without my assistance, as all of you are dipping into the same pool of economists for advice. Kennedy did not get his tax cut ideas from his economists, but from Ludwig Erhard, West Germany's Finance Minister, when he visited Berlin in late May of 1962. His own team of economists offered him only an "investment tax credit," which is not even in the supply-side inventory of ideas.

To finish off the thought about trial-and-error in the "Stupid Party," think back to Republicans winning both houses of Congress in 1994, after your guy, Bill Clinton, pushed through the Clinton tax increase without a single GOP vote. Newt Gingrich could take credit for the most spectacular congressional victory of the last half century, but what did he do? He decided to ignore his old supply-side pals and design a "Contract With America" that wound up shutting down the government. He did have tax cuts in the 10-point plan, but the most costly and least effective were those demanded by the Christian Coalition, subsidies aimed at "helping families," which in the end would help them not at all. When Speaker of the House Gingrich had a shot at getting a capital-gains tax cut or a balanced budget amendment to the Constitution, he chose the latter and got neither. When the Republican Party finds something that works, it discards it in favor of something that doesn't.

See what I mean? You do not have to abandon your core principles in order to address questions of optimum tax rates. Indeed, the problems any of you would face as President in 2005 and beyond will require great attention to these details. The projected deficits in Medicare and Medicaid alone cannot be solved without a dramatic increase in the capital/labor ratio, which means an optimum tax structure. You will not be able to solve these problems with any old economist out of the same old pool. Fresh thinking is needed in "the party of the people."

What I am going to do is send this to those who seem to be at least moderately interested in winning the Democratic presidential nomination in 2004. I'll include Sen. John Kerry of Massachusetts, Sen. Chris Dodd of Connecticut, Sen. John Edwards of North Carolina, House Minority Leader Richard Gephardt, Sen. Joe Lieberman, and of course the frontrunner, former Vice President Al Gore.