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Lessons from Cantor

A political shockwave went through Washington last week as a little-known college economics professor took down the second most powerful member of the U.S. House of Representatives. Out-funded, out-staffed and out-gunned in nearly every way, David Brat’s victory over House Majority Leader Eric Cantor in the Virginia primary will be talked about for years to come.

There’s a long history of Republicans being “primaried from the right.” It happens for a host of reasons: too disconnected with the district, too moderate, too ambitious or simply, too “Washington.” But one cannot discount that issues matter, as immigration reform did for Cantor.

GOP primary upsets are not new. In my early days in Washington I served on the staff of Senate Minority Whip Tom Kuchel. Like Cantor, Kuchel held a high post, spent a great deal of time in Washington and didn’t have the time to campaign. The growing seeds of conservatism during the Goldwater era led to a primary challenge and surprise defeat for Kuchel.

Unexpected defeats of icons are not limited to primaries. Years later, I was working with former House Ways & Means Chairman Al Ullman, who represented the state of Oregon. Ullman’s outspoken advocacy for a value added tax was a triggering event that led to his defeat during the Reagan landslide. Of course, the fact that his home address was a P.O. Box didn’t help matters. Conversely, there is another Oregonian today named Ron Wyden who understands the importance of retail politics. A few years ago I spent some time with him in Oregon and I discovered that no constituent and no event was too insignificant for his attention. He stays connected with his district, shakes every hand he can and has survived two decades in office. Today this Democrat serves as the Senate Finance Chairman and could write the next chapter in tax policy.

Historically, as Ullman discovered, the tax issue has been a ticking time bomb for many elected officials dating back to the original Tea Party in 1773. It’s a potent issue that Middle America understands because it hits its wallet directly. Blood pressures rise when Wall Street or special interests get tax breaks or when a neighbor gets a bailout for making bad mortgage decisions.

Sooner rather than later elected officials must revisit tax reform again. If they want to avoid the fate of Cantor and his predecessors, they should be cautious and avoid re-carving the existing pie for winners and losers. Rather, they should think about their constituents that work hard and save, but continually get punished by a broken and archaic income tax system.

Retiring Ways & Means Chairman Dave Camp deserves credit for trying to jumpstart a debate, but his tax reform package didn’t get out of the starting blocks namely because he only shuffled the deck chairs aboard a sinking ship–the income tax. How about trying something new? Not an add-on VAT, but turning the income tax into a consumption tax in which we reward, rather than punish, middle class Americans for saving—whether for retirement, education, or a rainy day. Revive Ben Franklin’s “a penny saved is a penny earned.”

Will it work? Time will tell but we know for sure that voters don’t like what we have now and that resentment can only deepen. Lawmakers should remember this as they work to avoid becoming the next Cantor.

They should also recall Tip O’Neill’s famous phrase, “All politics is local.”

Regarding Thomas Piketty

Thomas Piketty, a young French economist, is making tremendous waves as a critic of free markets and an advocate of a global wealth tax. He has taken America’s halls of power and the establishment by storm. Treasury Secretary Jack Lew invited him for coffee; the IMF, the President’s CEA, and the UN for lectures and briefings.  Capital in the Twenty-First Century, his academic treatise is on the New York Times bestseller list and #1 on Amazon.  Paul Krugman says: “This is a book that will change both the way we think about society and the way we do economics.”

 Piketty’s presentation is quite simple.  First, he has a first of its kind historical data on inequality of income and wealth dating back to the early 1900s for the US and Britain and reaching back to the late 18th century for France.  Second, he posits that the historical pattern of return on capital is 4 to 5% a year; rates of economic growth around 1.5% annually, which means that absent unusual circumstances, like the post-World War II period, extreme inequality is inevitable [Editor’s note: that’s not necessarily true because government redistribution through tax and spending programs could offset the inequality].  Piketty contradicts the influential theory of Simon Kuznets in the 1950s and 60s that mature economies provide for a rising tide for all.  With Joseph Stiglitz, Piketty states that growing and extreme inequality threatens Democratic institutions. Third, his call to arms is a progressive income tax with rates as high as 80% and a global wealth tax to penalize inherited wealth and “super salaries.”  Piketty doubts that tax increases hurt economic growth [Again, Editor’s note:  there is a lot of evidence to the contrary].

 If your blood pressure has gone up, consider the dispassionate “first thoughts on Piketty” by Gregory Mankiw.  He is a highly regarded economist, former Chairman of President Bush’s Council of Economic Advisers, and, we are proud to say, an ACCF Scholar.  He underscores three points.  Point one; the historical data is “a significant contribution.”  Point two, a forecast of how things will evolve over the next century, “is highly conjectural.” Point three, policy recommendations, such as a global tax on wealth, “is as much about Piketty’s personal political philosophy as much it is about his economics.”

Fortunately, a wealth tax is not currently in the cards for America, but what about in Europe?  Ideas do matter.  That is why Piketty could be far more harmful to investors and economic policy than the “Occupy Wall Street” phenomena. I know from personal experience, having been part of the initial small group of “supply-side” revolutionaries which critics called “voodoo economics.”  At first we were dismissed and not taken seriously, but ultimately better treatment of investors, innovation and solid economic growth became the centerpiece of Reaganomics and tax reform in 1981.

 Piketty’s U.S. tour has achieved red carpet status and it is critical to counterbalance his message and the intellectual powder he provides for President Obama and allies who call income inequality “the defining challenge of our time.”

Our challenge to Piketty is clear: Solid economic growth trumps wealth confiscation and income redistribution.

The Lesson of 25 years ago

A few weeks ago, I had a “Back to the Future” experience. My “day job” for almost four decades has been to worry about the US economic policy. Yet, all of I sudden I found myself in Bulgaria, a small East European country, thinking about their political economy.

It was the 25th anniversary of the “Bulgaria Economic Growth & Transition Project”, an initiative to help Bulgaria transition from the ashes of communism into a democracy and free economy. The initiative was the brain child of Dr. Richard Rahn, the former chief economist of the US Chamber of Commerce, a well-known free market economist and a dear personal friend. The project brought together volunteer American economists and policy wonks with the government of Andrei Lukanov (“the Gorbachev of Bulgaria” and the emerging new democratic parties. A report ensued, calling for privatization; basic reform of the monetary, banking and fiscal structures; industry sector reform and the rule of law. Sadly, the sound economic blueprint had a challenging road ahead – a transition never tried before, insurmountable political divisions and the emergence of what the disillusioned Yugoslav Communist Milovan Dilias called a “New Class” today known as oligarchs.

Before I spoke at a conference, perhaps, appropriately called “The Transition That Never Happened”, a Bulgarian friend of many years said “Mark, what transition? Have things changed for the better, especially for the average Bulgarian? Yes, we know there is a mafia, corruption and rule of law issues around the world but there is a difference – our country, as is Putin’s Russia, is owned by the mafia! This has serious impediment for our economy, apart from a transition to a working democracy

This 25 year journey has been a real privilege, an experience I will forever treasure, a real education about politics and economics and their interaction. I would like to share our reflections of this experiment.

Please see: http://www.thetransitionthatneverhappened.info

Also see my interview: http://www.thetransitionthatneverhappened.info/book/mark-bloomfield/

 

Buffett, Obama & Portman

Sometimes one can find a real gem in a Congressional hearing like this one from a March 5 Senate Finance Committee’s hearing on the President’s FY 2015 Budget. Senator Rob Portman (R-OH) is in a colloquy with Treasury Secretary Jack Lew over the infamous “Buffett Rule,” Warren Buffett’s contribution to tax policy which is now incorporated in President Obama’s budget.

PORTMAN: Let me ask again, Secretary Lew, about the impact of taxes on the economy. Let me give you an example to be sure you know what I’m talking about. You got the Buffett Rule in here again this year. And you say we need to increase taxes on what is really investment capital because the latest joint tax committee—an analysis of this says that it essentially creates a 30 percent minimum tax on income over a million bucks, raised $71 billion over 10 years, payroll taxes count towards the minimum, phased in.

Most of the taxes they say are going to hit capital gains and dividend income, which you know, help fuel investment that brings economic growth. Is it possible that such a steep tax increase for these kinds of investment income could reduce economic growth by even 1/40th of 1 percent? In other words, from 2.445 percent, which is projected to 2.420 percent. One-fortieth of 1 percent, is that possible, those kinds of taxes on investment income could do that?

LEW: Senator, I’m happy to go back and look at different estimates. On the back of an envelope it’s hard for me to tell.

PORTMAN: Well, the reason I ask you that is because if so, then the entire $71 billion that you’re raising through that tax is negated by slower economic growth.

It’s encouraging to have allies on Capitol Hill like Senator Portman, who has been a friend of the ACCF throughout his incredible career, when he served on the Ways & Means Committee, as OMB Director and Special Trade Representative and now as an influential US Senator.