Rising support, clear principles

Larry Kudlow
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Posted: Mar 07, 2003 12:00 AM

The war is everything right now, as Sen. John Warner observed at a recent lunch meeting in Washington. But policy work on the economy is running its course in various congressional committees while the war effort proceeds. On Capitol Hill -- despite a few naysayers in the GOP -- there is growing Republican support for the president's tax-cut package, including the dividend piece. Conservative policymakers are hard at work, and clear principles are guiding their efforts.

In a recent statement to the House Ways and Means Committee, new Treasury Secretary John Snow offered a strong supply-side defense of the president's plan to reduce income-tax rates, eliminate investor dividend taxes and provide new-equipment expensing for small businesses.

"Anything you tax more of, you will get less of -- including business investment," said Snow, in his pitch-perfect way. "Today, corporate profits are taxed at a 35 percent range and then these profits, which represent the return on business capital, are taxed again when paid to shareholders, so that the total tax return on this money can be as high as 60 percent."

Snow added that "the president's proposal lowers the cost of capital by reducing the double taxation of capital," and thereby "encourages investment and a higher long-term growth rate. Lower capital taxes mean more capital, which means higher productivity, which means faster growth and higher wages for everyone."

Snow is on message -- and he has quickly become a formidable player in Washington. There has been an outcry that he's complacent on the dollar, which has shown some weakness to the euro of late. But this is nonsense. Snow believes in a strong and stable currency, and he knows this will happen after Congress passes a broad-based tax-cut bill in a few months.

Following regime change in Iraq -- and regime change on dividend taxes and other pro-investment Bush proposals -- the dollar will appreciate significantly. In fact, sometime before this year is over the big issue is likely to be whether the Fed is inserting enough cash into the economy to accommodate the tax cuts and stop the dollar from being too strong. But as of now, Alan Greenspan's Fed is operating a loose, and appropriate, monetary policy.

Over in the House, Majority Leader Tom DeLay is totally supportive of the Bush plan. DeLay rejects the argument that you can't lower taxes because we're going to war. "You don't get economic growth by the status quo," he told me. "You don't get economic growth by spending, which is what Democrats want to do ... or by raising taxes."

DeLay intends to use his leadership leverage to pilot the Bush package through the House. He'll also use faith. Situated prominently in the sitting area of his office, DeLay keeps a beautiful plaque of the Ten Commandments. Like George W. Bush, he will rely on his faith to give him strength for the pending battles on terror, war, healthcare, judges and taxes. DeLay, an unshakable pro-growth advocate of conservative principles, is also keeping an eye on Greenspan to make sure he keeps Fed policy easy.

Over in the Senate, there is rising support among Republicans for the dividend tax cut, even while the final vote count is up in the air. More than likely a somewhat watered-down tax bill totaling $500 billion to $600 billion in static revenue costs will pass the Senate under budget-reconciliation rules that require only a simple one-vote majority. Then, in conference, the tax bill could be restored to the full $750 billion passed by the House before its final test on the Senate floor. Budget chairman Don Nickles is working hard on this front, and he has the support of the conservative leadership under Majority Leader Bill Frist.

American business desperately needs new capital. For all 11,000 publicly held companies, the rainy-day seed corn known as retained earnings has plummeted in five years from $225 billion to a dangerously low $16 billion. That's all they have left. If investor dividends are made tax free, shareholders will be encouraged to replenish the supply of investment capital to corporate America. This is the key point that Senate Republicans are beginning to understand. They're also starting to see many of the ancillary benefits of the Bush plan, such as more honest corporate governance and less burdensome debt financing.

Regime change in Iraq will help our ailing corporations and the stock market by boosting confidence across the board. But an unexpected victory on tax-free investor dividends will awaken the animal spirits on Wall Street and spur business expansion. The conservative majority in Congress and the indispensible John Snow at Treasury are thinking clearly about investment tax incentives. The inside-the-Beltway naysayers are wrong. The president's pro-growth tax plan is alive and well.