- The Washington Times - Thursday, July 20, 2000

Tax-cut fever has broken out in Washington, and it's a key driver behind the 10 percent stock market rebound since late May.

Conventional analysts keep obsessing about second quarter corporate profits. But that's yesterday's news. The real-time stock market is already a couple of weeks into the third quarter.

It's tomorrow's earnings that drive today's share prices. But future profits will be heavily influenced by the outlook for tax policy, which is the principle regulator of economic growth.

And the really big news is the unexpected tax-cutting tide coming from Congress. It's the new, new thing in economic policy. A pro-growth, pro-investor, pro-profits and pro-wealth creation tonic for the stock market.

One new tax-cut, is the passage of an estate tax phase-out, which swept the Senate by a 59 to 39 margin. Nine Democrats, or 20 percent of their caucus, voted to repeal the so-called death tax. This is new news. It shows the political clout of the new Investor Class, a group that I believe is the invisible whip-hand of American politics today.

Current law imposes a 55 percent marginal tax-rate on estates above $675,000 for singles and $1.35 million for married couples. But in a decade where household wealth has increased by $20 trillion, those thresholds are way too low. And the 55 percent tax-rate is the last lingering tax remnant above 50 percent. All the rest were slashed by President Reagan in 1981 and 1986.

Think of this. A family that owns an annually increasing 401(k), along with a variable annuity or a variable life insurance contract, as well as a medium-sized home, will have little difficulty clearing the $1.35million wealth threshold in today's prosperous Internet economy.

Think of this. All that old-time religion political rhetoric about not helping rich people misses the very essence of current economic life. More and more folks are getting rich on a daily basis. And those that haven't already, aspire to do so in the near future.

This prosperity spirit has become so pervasive that even President Clinton had to take time out from his class warfare bashing of the rich in order to present his own means-tested and politically-targeted estate tax-cut plan. And, when not trashing oil, insurance and tobacco companies, Vice President Al Gore supports the administration proposal.

The president says he will veto the Republican estate tax elimination plan. Perhaps he will. But recall, in 1997 he vetoed the capital gains tax-cut a couple of times before he finally signed it into law. So it's not over until it's over.

Besides helping too many super-rich people, the president's big gripe against the Republican bill is cost. According to the Clinton Treasury Department, the GOP bill will cost nearly $200 billion over ten years. The president's bill, meanwhile, would only lose $100 billion. Guess you get what you pay for.

But ace supply-side revenue estimators Gary and Aldona Robbins, who worked in the Reagan Treasury Department, think otherwise. They believe that the growth- and wealth-creating incentive effects of abolishing the 55 percent estate tax-rate would generate $700 billion in added gross domestic product.

The economic principle here is simple: by taxing investment and wealth less, more investment and wealth will be supplied. So will more risk-taking. New and larger estates are made more likely if the estate tax is eliminated. The economy's potential to grow would expand.

So, the Robbins' believe, after seven years nearly $150 billion in added revenues from higher income, payroll, excise and other federal taxes would virtually cancel any net revenue loss. Of course, in a dynamic model of economic growth, substantial stock market appreciation as a result of this pro-growth tax-cut would generate an avalanche of capital gains-related tax revenues. In the end, estate tax elimination would probably be revenue positive, actually increasing projected budget surpluses.

No wonder stock market investors are in a buying mood. They figure that sooner or later, pro-growth tax-cuts are coming. As economist Arthur Laffer recently put it, the growing stockpile of anticipated Federal surpluses amounts to an inventory of future tax-cuts.

President Clinton may veto the estate tax cut, but GOP Congressional leaders have more up their sleeve. There's the marriage penalty relief bill that would raise the standard deduction to $8,800 and broaden the 28 percent income tax bracket threshold to prevent real income bracket creep.

Also, both the Senate and House tax-writing committees are cooking up a super-saver expansion of 401(k)s and IRAs. This may also include back-ended Roth IRAs. All pro-investor, pro-growth and pro-wealth.

And don't forget, the Republicans have already passed and the president has signed a bill to lower the Social Security earnings test for post-retirement working seniors. Also a pro-productivity and pro-growth measure. All those gray beards will teach the sub-genXers how to show up ontime, tie their ties and … spell and, like … . speak properly.

I can't remember who first said it, but Republicans were put on this planet in order to cut taxes. That's really all they ever do well, when they do it.

So the stock market is probably just as pleasantly surprised as I am that the GOP Congress is in fact fulfilling its heavenly purpose.

Therefore, just as the pessimistic bubbleheads and irrational expectionists thought their day had come, the prospect of pro-growth tax-cuts has revived the equity market animal spirits. If not now, then future Congresses and future presidents will be taking action to bolster future earnings.



Lawrence Kudlow is chief U.S. investment strategist and chief U.S. economist at ING Barings LLC.

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