Kemp Opposes the GOP Budget
Jude Wanniski
June 5, 1998


In my Monday letter, I reported that only a last-minute effort by Jack Kemp to rally the House Republicans might avoid a budget resolution without meaningful tax cuts. There is still a chance Newt Gingrich may not get the votes for the austerity budget put together by House Budget Chairman John Kasich -- which proposes to fund $100 billion in tax cuts over five years by cutting spending, instead of using projected surpluses. Kemp, though, failed in his efforts with Kasich and other Republican leaders to adopt his bolder plan that would force the President and the Democrats to actively fight serious tax cuts. In a statement issued this morning, Kemp announced his opposition to the Kasich plan. “It is disappointing, weak and defeatist. It refuses to make serious, broad-based, across-the-board tax rate reductions at a time when the tax burden on American families, workers and investors is at an all-time high, and we are looking at structural budget surpluses as far as the eye can see.” His statement continued:

“If Ronald Reagan could cut tax rates dramatically across the board, with deficits looming as far as the eye could see, why can't a Republican Congress cut tax rates across the board with surpluses looming as far as the eye can see? My opposition to this budget plan goes far beyond its immediate failure to grant all hard_working Americans a significant tax cut this year, as unfortunate as that fact is. My grave concern is that by adopting this austerity budget framework...the GOP will be signaling that austerity has recaptured the party. By keeping taxes higher than they need to be -- higher than ever before in our history -- with huge structural budget surpluses looming, our Party would denounce the growth strategy for America and proclaim an elitist commitment to debt retirement over economic freedom and growth. This austerity budget tells the country in no uncertain terms that Republican politicians don't trust the people but rather they think politicians must hoard surpluses in Washington because they know better than workers and entrepreneurs what to do with Americans’ hard-earned income.

“By proposing only minuscule tax cuts, which first have to be ‘paid for’ with offsetting spending reductions, House Republicans are succumbing to the sophistry of the Clinton Administration, which pleads uncertainty of future surpluses as one more excuse not to cut taxes. But, budget surpluses don't just disappear for no reason. Budget surpluses of the magnitude now being projected (more than $1 trillion during the next five years) result from structural factors in the budget and economy that determine economic growth, spending and revenue trends over the long run. For example, since the progressive tax code is not indexed for real economic growth, each year that people's inflation-adjusted income rises, the government taxes a bigger share of their paychecks [which] guarantees that federal revenues as a share of GDP will automatically rise unless Congress acts to prevent it by widening tax brackets as well as cutting tax rates. 

“Unless Congress and the President go on a spending spree or a policy mistake is made that sends the economy reeling, large structural budget surpluses will continue well into the future. And, no amount of hoarding surpluses today can mitigate the effects tomorrow of an actuarially unsound Social Security system. No amount of debt retirement can compensate for the economic damage done by keeping tax rates at their present level. The only way to fix Social Security is to overhaul it by rebuilding the program on a foundation of private retirement accounts and at the same time strengthen the long-run performance of the economy to support it, especially during transition to the new system. Specifically, the only way to guarantee retirement security to every American is to give workers the right to invest part of their payroll taxes in the private economy and to make sure that the economy grows closer to 3.5 percent a year than to the 2.1 percent projected indefinitely into the future by CBO and the Social Security Trustees.  

“The Democrats and many of the GOP's own cultural conservatives are now making the argument that the economy is doing just fine and there is no need to do anything more than targeted tax cuts for social engineering of one kind or another. The fact is, unless we give workers the freedom to invest some of their payroll taxes today, make the investments now in future capital formation, and further expand the economy, we really will have a bankrupt Social Security system on our hands in another 15 years and no means to fix it. Our objective has to be to lower the cost of capital and raise real wages as rapidly as possible in the generation ahead, so that individuals investing for their own retirement can overwhelm the projected red ink in all the pension systems, public and private.

“The President's own forecast of an economic slowdown belies the assertion that the economy does not 'need' a tax cut with the stock market flying high and the unemployment rate at a 30-year low. If the President's economic forecast is correct, then the economy certainly does need a significant tax cut. And, if Republicans believe the Clinton forecast might be correct, we have an obligation to keep the economic expansion rolling by sending him legislation lowering the cost of capital to make labor more valuable and raise take-home wages by cutting tax rates across the board, for everyone, not just a few politically favored groups. If the President's economic forecast is wrong, strong economic growth will guarantee a tidal wave of revenue into the Treasury, and that money should be returned in tax cuts -- sooner rather than later, more rather than less, at the appropriate time -- NOW! Either way, strong growth or weak, the order of the day is Reaganesque, pro-growth, pro-family, pro-investment tax rate reductions.

“One thing is certain: Refusing to cut tax rates because budget surpluses may only be transitory will become a self-fulfilling prophecy. The fastest way imaginable to turn President Clinton's pessimistic economic forecast into a dismal economic reality is to maintain high tax rates on saving, working and investing in an ill-conceived effort to hoard budget surpluses in Washington. If all Republicans saw their leaders willing to go to the mat on passing serious tax rate reductions, we could unite economic and cultural conservatives. If the President were to veto our tax-cut program, we at least would have roused our constituents across the land, who will finally see us acting like a governing party. I urge Republican leaders to think long and hard before passing this politically damaging and economically self-defeating budget plan.”

Without any support from the GOP congressional leadership, Kemp is alone in a party that is divided between two austerity factions: those led by Wisconsin’s Rep. Mark Neumann, who want to use all the surpluses to pay down national debt, and the phoney tax-cutters led by Kasich, who ignore the projected surpluses and insist on down-sizing government by cutting spending in parallel. It is the Kasich position that led Gingrich to twice close down the government in 1995, which cost the GOP the presidency in 1996. Unless there is a quick turnaround to the Kemp position, the divided and demoralized GOP may lose the House. In a lead editorial this morning, The Washington Post says as much, cackling all the way.