Matt Zeitlin

In a move that is sure to surprise everyone, Larry Kudlow disagrees with David Brooks as to whether the Republicans should continue to place the reduction of marginal income rates at the core of their fiscal and economic policy. Kudlow argues that because low income rates lead to higher growth, Republicans should still pursue a low income rate agenda:

Deserting the 100-million-plus investor class, as Brooks suggests, would be economic and political folly.

In today’s innovative high-tech world economy, where the global spread of free-market capitalism is the single biggest growth factor, saying “the entrepreneur is no longer king” is just plain wrong. New technologies and new companies are springing up everywhere, and it is precisely this Schumpeterian process that is the single-biggest driver of jobs, incomes, prosperity, and wealth creation.

The targeted tax credits that David Brooks supports have no impact on incentives or economic growth. However, slashing marginal tax rates (as Rudy Giuliani and Fred Thompson propose) has the maximum economic-growth impact.

While I think Kudlow is right about one thing – economic growth is important – it’s easy to see why so many smart conservatives like Ross Douthat, Reihan Salam, Ramesh Ponnuru and David Frum are abandoning the marginal tax rate reduction uber alles agenda. Kudlow talks about the “100 million person investor class” that the GOP would be “abandoning”, and while it’s true that a lot of people are investors, the ones with the most to gain from capital gains rate reductions are the top ten percent of the income distribution, who own something like 80 percent of all stocks and are also more likely to hold onto their capital investments for long periods of time and thus pay even lower capital gains rates. Considering the distribution of benefits from an extreme supply-side agenda, Kudlow’s tribute to Schumpterian process of creative destruction probably falls on deaf ears for those in the middle class whose incomes have stagnated in the last six or so years.

David Frum, in his new book Comeback, explains why the tax cutting agenda may not have the same appeal it did in the Reagan years, “Yet after almost three decades of income-tax cutting, most Americans no longer pay very much income tax. In fact, four out of five taxpayers now pay more in payroll taxes than federal income taxes. Some 29 million income-earning American households pay no income tax at all.1 By contrast, the notorious top 1 percent of taxpayers pay well over one-third of all U.S. income taxes. The top 1 percent may make a disproportionate amount of money. But they still cast only 1 percent of the votes.” Is it any surprise why more and more Republicans think that the orthodox supply side agenda has little appeal to their middle class base? (Note – Frum advises Giuliani).

To add insult to injury, not only is Kudlow’s vision for GOP fiscal policy politically tone-deaf, it actively denigrates the middle class. He says, “The targeted tax credits that David Brooks supports have no impact on incentives or economic growth.” I would pay good money to see Fred Thompson or Giuliani sell a fiscal policy whose central insight is that when the middle class gets more money, it doesn’t benefit the country as a whole, but when the rich get their income and capital gains rates slashed, we all benefit. In a world of increasing economic anxiety, vast inequality, wage stagnation and low social mobility, telling people that they should just wait for gains generated by a tax code suited towards the rich to trickle down to them (even though income and capital gains taxes are still pretty low) is a sure path to political exile.

So I guess my advice for Republican presidential candidates, journalists, pundits, thinkers and everyone associated with the conservative movement and the Republican party is:

DO NOT LISTEN TO DAVID FRUM. LARRY KUDLOW IS CORRECT ABOUT EVERYTHING!