Now it's Us vs. Them

Larry Kudlow
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Posted: Jan 22, 2004 12:00 AM

The Iowa Democrats did the entire party a favor by nominating Sens. Kerry and Edwards -- rather than the nutty Howard Dean -- in their caucus votes Monday. But the results need a reality check.

With their Us vs. Them vision of the economy and culture, Kerry and Edwards are clear enemies of the investor class. Though they themselves are millionaires, they are running against successful earners, entrepreneurs and investors -- people who worked their way into higher tax brackets and benefited greatly from President Bush's 2003 tax-cut plan. Namely, Kerry and Edwards would cancel the tax cuts on investor dividends and capital gains, repeal the drop in high-end income-tax rates and overturn the planned elimination of the inheritance tax.

This is why the stock market opened the day after Iowa on a less-than-gleeful note, despite booming earnings reports left and right. The market knows what the new Democratic frontrunners seem not to know: Bush's tax cuts on investment have resurrected the stock market and reignited the economy. Instead of punishing investment, Bush's plan rewarded it. By taxing capital less, indeed roughly 40 percent less, we are getting more capital investment.

If elected, however, Edwards would raise the tax rate on capital gains to 25 percent from 15 percent. Both candidates would eliminate the 15 percent tax rate on dividends and roll it back to the new higher top tax rate, which would be somewhere between 40 percent and 45 percent.

Apparently neither man understands the incentive model of economic growth, which is the backbone of supply-side economics. Their class-warfare approach to the economy seems to assume that by hurting the rich, they will somehow help the non-rich. This is the classic fallacy of the so-called populist approach of liberal Democrats in recent years. It is completely at odds with President John F. Kennedy's vision of rewarding everyone in society with lower tax rates, which are designed to produce a larger economic pie.

A winning tax program is never about those who are already rich. They can shelter and hide their money from the IRS 10 different ways. But a truly growth-oriented approach to tax policy provides fresh rewards for those attempting to climb the ladder of success. However, barricading the doorway to opportunity is no way to make the non-rich rich.

Countries all over the world have been reducing high marginal tax rates in order to spur more work and investment. JFK understood this 40 years ago. But for some reason, Kerry and Edwards have failed to either read or understand history. Rather than borrow a page from Kennedy -- or his Democratic descendents Zell Miller and John Breaux -- they've gone to the playbook of Walter Mondale and Michael Dukakis.

The oddest paradigm of all comes from Edwards. He talks about creating a "movement" that will somehow bring down rich America in order to boost "ordinary" America. This class-warfare speak is circa 1920, and it makes no sense in a United States where 55 percent of families -- over 90 million people -- own stock. These are the folks who supply savings to new business ventures that create new jobs.

More, Edwards makes a good show of lashing out at special interests. But the former trial lawyer is the tort bar's main man in Washington. Formerly great American companies like Bethlehem Steel, Kaiser Aluminum and W.R. Grace were bankrupted by asbestos lawsuits, but Edwards does not appear inclined to eliminate frivolous litigation and unsubstantiated tort claims. Nor does he realize that reforming medical malpractice lawsuits would be the greatest single contribution to lower health-care costs.

When it comes to taxes and tort, there's nothing moderate about the new Democratic frontrunners. Yet President Bush -- particularly by reducing tax burdens across the board on the ownership class -- has demonstrated a true understanding of what makes our economy tick.

And he knows there's more to do. His push for new tax-free savings plans will provide even more capital for the expansion of American business and jobs. Rewarding success, not punishing it, is the Texan's key understanding of a modern-day economy.

Be it Us vs. Them, or Rich vs. Ordinary, Americans now have a clear choice between government dependency and individual responsibility and opportunity. Whether it's Kerry, Edwards, Dean or whoever in November, the Democrats have drawn the line in the sand this election. Perhaps it will be a replay of 2000, where Gore took a populist left turn and deserted Clinton centrism. But this time, a rising economic tide, and the new wealth creation of the investor class in 2003 and 2004, means the ownership vision will triumph over the big-government hallucination.