President Obama opened his State of the Union address with a quote from President John F. Kennedy: “the Constitution makes us not rivals for power but partners for progress.” But Obama’s speech that followed and the agenda it advocated indicate he failed to study JFK’s famous 1963 State of the Union and its ambitious program of tax cuts and tax reform that successfully shifted the U.S. economy into high gear.
“The mere absence of recession is not growth,” Kennedy said. Words that ring even more true now, with the U.S. economy mired in the weakest recovery of the post-war era. Obama’s response to the challenge of slow growth? More taxes and more spending. A replay of the first term agenda that so spectacularly failed. “Broad-based economic growth requires a balanced approach to deficit reduction, with spending cuts and revenue, Obama said, with “revenue” being Washington-code for another round of tax hikes.
Kennedy knew better. “One step, above all, is essential--the enactment this year of a substantial reduction and revision in Federal income taxes,” he said. “Our obsolete tax system exerts too heavy a drag on private purchasing power, profits, and employment.” He went on to highlight a program of genuine tax reform, lowering rates across the board “with selected structural changes, beginning in 1964, which will broaden the tax base, end unfair or unnecessary preferences, remove or lighten certain hardships.”
Kennedy knew that to spur economic growth, tax reform would cause a short-term drop in tax revenue to the government, but that “increasing the amount of our national income, will in time result in still higher Federal revenues. It is a fiscally responsible program--the surest and the soundest way of achieving in time a balanced budget in a balanced full employment economy.”
Obama, in stark contrast, uses the words “tax reform,” but what he really means is simply a massive tax hike. “To hit the rest of our deficit reduction target,” i.e., to collect more tax revenue for government, Obama advocated what we “save hundreds of billions of dollars by getting rid of tax loopholes and deductions for the well-off and well-connected.” Real tax reform uses simplification to offset some of the short-term revenue losses from lower rates. Obama’s plan is a tax hike, which will damage the economy and make genuine reform more difficult by using simplification to pay for more spending instead of lower tax rates.
There is no question that the tax system is holding us back economically, especially the 35 percent corporate income tax which is the highest in the developed world. The average state corporate tax brings the rate up to 39.2 percent, versus an average in other developed countries of just 25 percent. Obama committed to bringing more manufacturing jobs back to the U.S., but his government research centers will do far less to encourage that than making our tax system more competitive.
President Obama was absolutely right when he said “It’s not a bigger government we need, but a smarter government that sets priorities and invests in broad-based growth.” One of the top priorities, therefore, should be real tax reform – not as Obama described it, but as Kennedy did – designed to boost the long-term growth path of the economy.