During last night’s Kudlow & Co, the conversation turned towards the subject of Taxes. I have hinted at my views over the years, but never gone into terrible detail here. Given what today is, its as good a time as any to flesh out these ideas.
1. Capital Gains Tax Cut: Markets did pretty well with a 20% Cap Gains rate during the 1990s. Rather than merely keep the rate at 15% (what the GOP wants), or raising it back 20% (what the Dems want), I propose the following: Let the rate go back to 20%, but carve out a deep discount — a 10% capital gains rate — for all alternative energy research and start ups. This should include research for nuclear power, waste storage, etc.
The priority should be to fund the small start ups that are the engines of innovation, and not just create another giveaway to oil companies (disclosure: I own COP and BP).
Incidentally, this is not primarily a "green" tax cut. As I said on K&CO. last night, energy independence is a matter of National Security. Thomas Friedman is correct: We are funding both sides of the war on terror, and we need to stop sending our money to really nasty people in bad parts of the world.
2. Alternative Minimum Tax (AMT): Since the AMT isn’t indexed, it keeps creeping down the economic strata as inflation drives salaries higher (but not standards of living). Drop the AMT to a flat rate (20%?) for those making under $500k. This is very consistent with our views that the Middle Class squeeze is having an increasingly pernicious effect on U.S. families.
I’ve gotten tagged by the AMT in the past, and its no fun. But I was really surprised how many people I know, making what I would describe as a reasonable middle class salaries (but by no means wealthy) who are part of the AMT issue.
In 2006, ~3.4 million people got caught by the AMT. Estimates for 2007 go as high as "23 million households." This is far beyond what the original intention of the tax was . . .
3. US Taxes are not very high: There are two schools of
thoughts when it comes to taxes: Some believe they should be cut
regardless, while others believe tax cuts can be targeted to achieve
Where I fall is somewhere in between these two schools: When taxes
are terribly high, they are repressive to all economic growth, and
should be cut regardless. That was the case decades ago, but is no longer true today. (Even Larry would agree with that).
Dropping the top rates from 90%/75% to 20-40% was an enormous shift with major repercussions; Cutting the top marginal rate from 39% to 36% is merely a tax cut for cutting’s sake.
4. Pay-as-you-go works. The biggest problem in terms of budget deficits is that spending and tax cuts never seem to be paid for. As bad as the Dems were in terms of reckless spending, the past few years have seen an even more wanton approach to the ideas of fiscal conservatism, balanced budget, and small government.
Paygo is pretty simple: Tax cuts need to be paid for with spending cuts; Spending increases need to be paid for with Tax Increases. A Paygo system should keep both government spending and tax increases under control, as it forces each party to contemplate doing what they don’t want.