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Tax Cuts: Jack Kemp

February 26, 2001 at 12:00 AM EDT
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RAY SUAREZ: Jack Kemp served as Secretary of Housing and Urban Development in the first Bush administration and was the Republican Party’s Vice Presidential candidate in 1996. He is now co-director of Empower America, a public policy think tank in Washington. Mr. Secretary, welcome back.

JACK KEMP: Thank you Ray.

RAY SUAREZ: You’ve called for tax cuts throughout your career. Did the bush team get this one right in its proposal?

JACK KEMP: Well, they got the beginning of it. I think the ultimate proposal is to reform the tax code. I must say today, Ray, I was very pleased to see Larry Lindsey talk about fundamental overhaul of the tax code leading towards simplification, rate reduction and a far more efficient use of our nation’s resources. So, cutting the rates across the board is a very good idea. We’ve got to jump-start this economy. In and of itself alone, that’s not enough. But with fundamental tax reform and a new Federal Reserve Board policy, I think we could get the economy back on the high growth rate.

RAY SUAREZ: At $1.6 trillion distributed among income taxes, ending the estate tax, phasing out the marriage penalty, a grab bag of things, is it about the right size?

JACK KEMP: Well I would look at it a little bit differently, looking at it at $1.6 trillion over ten years is kind of the aggregate in a static sense. And if nobody did anything with their new lower tax rates, you’d probably lose $1.6 trillion, but many of us believe that as rates come down, you increase the rate of return on working and saving and investing in this economy, and there would be a feedback. Of course that would be debatable, you know? Friends on the left say it would ruin the economy as Bob Rubin told you Friday. But I see it as a tremendous strategy headed towards reform of the tax code, simplification of this cumbersome and confusing and, in some cases, corrupting tax code. So I’m very pleased that George Bush has it about right. It wouldn’t be Jack Kemp if I didn’t say I’d like to see the capital gains come down and get indexed but it’s a good start.

RAY SUAREZ: If the tax cut was a lot larger as you proposed recent op-ed piece in the “New York Times,” would the Bush administration be able to do the things that it says it wants to do with the surplus– pay down the debt, protect Social Security, shore up Medicare– along with cutting tax rates?

JACK KEMP: Well, in my article in the “New York Times” last week, to which you allude, I suggested that I thought, I believe, that the CBO, the Congressional Budget Office is understating the surplus. We have estimated surpluses over the next ten years of 5.6 to $6 trillion. We think that’s about two trillion off. You can’t go by Jack Kemp. But clearly they’ve understated the surplus, A. B, you won’t have the surplus unless we have a strong economy. I’ve been making the case for years that high tax rates reduce the ability of revenues to grow sufficiently strong enough to give us those revenues for spending, for paying down debt or for removing the penalty for getting married. So I’d like to see the capital gains rate come down because I think that would be the biggest bang for our buck. There is a clear feedback effect from cutting the capital gains tax. It should be eliminated. Alan Greenspan said there’s no cause to tax capital gains. It’s already been taxed and putting your money at risk is what creates the wealth that creates the tax base, which creates the revenues and puts people to work.

RAY SUAREZ: When Robert Rubin was here Friday night, he suggested that a tax cut was in order but that until we see whether these projections about the coming surpluses were really going to come true or not, we should step cautiously. What do you think?

JACK KEMP: Fair enough; fair enough except for one thing. He’s got the cart before the horse. In other words, as a supply sider, as somebody who believes in growth and removing obstacles to growth– interest rate that are too high, regulatory policy that is too strict or too aggressive or too robust, tax rates that are too high, as Kennedy said one time — it’s a paradox that high tax rates cause less revenue. The way to get more revenue for the government is to bring down the rates. You can’t go to 0 rate because you’ll have no revenue but you can’t go to 100 because you have no refuse revenue there. And as Arthur Laffer pointed out, you have to set the rates at the level of equilibrium at which people are willing to work their hardest, invest their income, surplus income the most and create the most dynamic economy. We’re making a case that taxing people at 38, 40 and over 40 percent is actually causing people to make decisions based on the tax consequence rather than on the economic consequence. So I would tell Bob Rubin I enjoyed your article, Bob, but you won’t get more surpluses, you won’t get a good economy unless we get the rates set at a better level. I think George Bush is at least on target with regard to the income tax rate – I’m making a case that the capital gains rate should come down and we should index it.

RAY SUAREZ: One of the rationales being offered by the new administration for a tax cut right now is that it would help stimulate an economy that is starting to slow down a little bit.

JACK KEMP: It is more than slowing down a little bit. We’re headed for a very hard landing.

RAY SUAREZ: Would a cut stimulate the economy in the near term?

JACK KEMP: I said in the opening answer to your question, your first question that I didn’t think a tax rate reduction in and of itself was enough because I’m making a case today and have for the last several weeks that the Federal Reserve Board, Chairman Greenspan who is a friend of mine and I’ve been a fan of and I’m glad Bill Clinton reappointed him. He was appointed under Ronald Reagan. I supported that. Now that I’ve got all those conditions out of the way, he’s far too tight. Unless they ease up and provide more liquidity that a tax cut would demand, you could have the situation that we had in the early 1980s when Paul Volcker tightened thinking that Reagan’s tax cut or Kemp- Roth rate reduction would over stimulate the economy and it was going to unleash inflation. You have to have a monetary policy that fits your fiscal policy. Right now it’s out of sync. My hope is that the chairman of the Fed, Chairman Greenspan will not only lower interest rates another 50 basis points or 100 basis points, it came down to 3 in 1994 I think — but that we get a good across-the-board rate reduction. It’s retroactive to January 1, 2001; and we get some movement on capital gains, and then I will jump up and begin talking about reforming the tax code and simplifying it until the taxpayers can fill it out on a postcard.

RAY SUAREZ: Is it fair to say that you’ve parted company with former colleagues both from the Democratic and Republican Parties on the centrality of paying down the debt? Is it not that important to you?

JACK KEMP: Well, let me put it this way. You and I talked about this a little bit before the show. The debt is coming down as a percent of our economy. That’s good. It’s come down from 54% of GDP, the Gross National Product; it’s come down to 46%. It’s now down to 35.6% of our Gross Domestic Product. That’s good news. You must measure debt as a percent of your economy. Jim Kelly played quarterback after me with the Buffalo Bills, and he had $150,000 mortgage in the suburbs of Buffalo. My wife and I lived in Hamburg, New York, and we had a $150,000 mortgage. I made $50,000 a year. He made $5 million a year. We had the same debt, but he can service his debt a lot better than Jack and Joanne Kemp at $50,000. $5 million income can serve a debt a lot easier than the $50,000. So getting the wealth of our nation rising, getting the tide rising in our nation, that will get all boats up, and where boats are sunk, repair them. Get people job training, job opportunities, education. We want the inner cities of America to do well. And incidentally, I haven’t parted company with anybody. I do part company with those on the right and on the left who say we should use this tax code to pay off this debt. That would be silly.

RAY SUAREZ: Doesn’t it help create a larger pool for borrowing in the economy?

JACK KEMP: No. If deficits crowd out saving, so do taxes. I’m making a case here tonight that the tax code is crowding out savings. The reason that our savings rates are not as high as they otherwise would be is because our tax code punishes labor, i.e. working men and women. A single schoolteacher, a teacher who is single, living in Washington, DC, pays an income tax rate and a payroll tax rate that is just inexplicable in peacetime, higher than 28%. That’s not right. So clearly that crowds out her savings. So… and incidentally, one other statistic — and I know statistics can be used any which way you want, but people can check it out. We have a surplus. Most people acknowledge that. Interest rates are higher today than they were when we had a deficit. We had a deficit in ’93 coming out of the recession. Interest rates were lower in ’93 than they are today in 2001. Why is that? Because of the Federal Reserve Board sets interest rates, not the level of debt as a percent of the economy or the deficit itself.

RAY SUAREZ: Secretary Jack Kemp, thanks for coming by.

JACK KEMP: Thank you, Ray. Nice to be with you.