The GOP Pro-Growth, Flat-Tax Competition

Larry Kudlow
October 21, 2011 5:00 P.M.
The GOP Pro-Growth, Flat-Tax Competition
Stocks love it, too.

The latest Gallup poll pegs President Obama’s approval at a new low of 41 percent. That adds to the thought that the winner of the GOP presidential-primary sweepstakes is going to be the next president.

And inside that Republican contest, the policy pendulum is swinging toward pro-growth, flat-tax reform. A new agenda. With Herman Cain’s 9-9-9 plan and the announcement of a Steve Forbes-type flat tax from Gov. Rick Perry, the GOP flat-tax-reform competition is dominating the headline news.

While President Obama stumps for huge tax hikes — on incomes of $200,000 to the millionaire and billionaire level — and demoralizes businesses and entrepreneurs with his populist attacks on success and risk-taking, the GOP is fast coming up with a much better idea.

The handwriting is now on the wall. A huge part of the 2012 campaign will be pro-growth tax reform versus “fairness,” redistribution, and soak-the-rich. In a stalled-out economy, I’ll take the supply-side bet anytime. Pro-growth, flat-tax reform is going to win.


The stock market gets this. The flat tax is bullish. In late September, Herman Cain trumpeted his 9-9-9 flat-tax/fair-tax hybrid reform plan at the Orlando, Fla., debate. Since early October, stocks have come out of their funk, rising 12 percent.

Coincidence?

Part of the stock rally is based on strong corporate earnings, the mother’s milk of stocks. So far for the third quarter, almost three-quarters of reporting companies have beaten estimates, with overall profits coming in about 14 percent ahead of year-ago. And investors are hopeful that Europe will solve its sovereign-debt and banking woes.

But the sudden stock rally could also be discounting a new GOP growth plan that will replace the dreary Obama tax-the-rich mantra.

Investors read the political polls as well as the earnings results. And investors sense that a rejuvenated Republican party — with candidates competing for the most pro-growth, incentive-oriented tax reform — bodes well for America’s economic future. So with the election a little more than a year away, stocks may be thinking about a new Reagan-like era in economic policy.

An era when success is rewarded, not punished. An era when consumption is taxed more while saving and investment are taxed less. An era when capital formation rises from the ashes to produce a new surge in productivity, jobs, and real incomes. An era when simplicity trumps $450 billion in compliance costs; when a new Republican party means business when it says it will drive a stake through a tax code that has been a ball-and-chain to the economy.

Add to that widespread agreement among the GOP candidates for strict spending limitations; a regulatory rollback; an unleashing of Americas oil-and-gas shale revolution (which will give us energy independence); and the likelihood that a Republican president will stop the Federal Reserve from devaluing the dollar and flooding the financial system with an overload of new money. All the GOP frontrunners would replace Ben Bernanke, and at least Cain and Perry have hinted at re-linking the dollar to gold.

And all these policies mark a return to the Reaganesque principles that rejuvenated free-market capitalism 30 years ago and could ignite an economic-growth surge once again — even amidst all of today’s doom and gloom.

Herman Cain’s 9-9-9 is not perfect. But it embodies important growth incentives along with simplification. Rick Perry’s plan comes out this week, and it’s likely to feature a single tax rate that resembles Steve Forbes’s 17 percent flat tax for individuals and corporations.

Both Perry and Cain include 100 percent cash expensing for new-business investment. Both Cain and Perry would eliminate the double tax on capital gains and other investments, as well as the double tax on the foreign earnings of U.S. companies. Cain recently amended his plan so that people living under the poverty line will pay a zero personal tax, while businesses locating in “opportunity zones” may get tax-free investment and even tax-free wages. This borrows from the late Jack Kemp’s empowerment-zone idea.

Earlier in the campaign, Jon Huntsman came out with a flatter tax, with a top rate of 23 percent and three brackets, which is similar to a number of Republican congressional proposals that would cap the top rate for individuals and corporations at 25 percent. Now it remains up to Mitt Romney to unveil a much bolder tax-reform measure that can compete effectively for the Republican nomination.

And all these ideas would represent a complete reversal from Obama’s vision of taxing the rich and penalizing successful small-business owners. In fact, on taxes, regulations, spending, and monetary policy, the expected GOP economic platform will represent a total repudiation of Obamanomics — a stark contrast for voters.

Stock markets and the general public are taking notice. GOP tax-reform competition will produce an outstanding pro-growth plan. And that is going to defeat Obama in the ultimate competition next November.

– Larry Kudlow, NRO’s economics editor, is host of CNBC’s The Kudlow Report and author of the daily web log, Kudlow’s Money Politic$.