- The Washington Times - Thursday, September 16, 2004

As George W. Bush mounts a strong comeback in the polls, stock market averages mount their own stealth recovery. There’s a clear link here. If the president is re-elected, tax rates on capital will stay low and may even drop some more. Wall Street likes this.

Mr. Bush’s tax reform concept focuses on reducing multiple taxation of saving and investment. Under current law, the same income dollar is taxed once as work effort, then as corporate earnings, as dividends, as capital gains and then a fifth time as inheritance. This is a capital killer.

Without capital, there is no investment funding for the very businesses — large, small, old or new — that create jobs. Levying tax penalties on capital, as Sen. John Kerry would do if elected, would curtail the supply of the very seed corn necessary to grow the American economy. Capital is labor’s best friend. John F. Kennedy understood but his Democratic Party has long since forgotten this.

Mr. Kerry’s Europeanized domestic plan would set up tax penalties on capital formation, upward mobility and formation of job-creating businesses. For the 90 million-strong investor class, Mr. Kerry’s taxes on dividends, capital gains and the most successful earners are a tax on the stock market — and therefore a tax on economic growth and wealth creation.

On the flip side, Mr. Bush would use personal control, individual responsibility and tax-free savings accounts to create new wealth for retirement, health care and education. This is his ownership-society vision. It would represent a sea-change in policy. Instead of government-directed solutions, Mr. Bush would move the country toward consumer- and investor-based solutions. Government dependency would end.

The stock market is a proxy for the future value of private-sector free-enterprise. So it’s no wonder share prices rise along with Mr. Bush’s polls. Online pay-to-play trading markets show sizable Bush leads. The Iowa Electronic Market has Mr. Bush at 57 cents and Mr. Kerry at 43 cents. A month ago, these contracts were dead even. The Tradesport.com market has Mr. Bush at an incredible $63 and Mr. Kerry at a dismal $35.

The Gallup poll has Mr. Bush ahead 52 percent to 45 percent. More revealing, Gallup shows a major Bush move in key battleground states. In Missouri, Bush is up 14 points; in Ohio and Wisconsin,up 9 points; In Pennsylvania, he’s about even.

Noteworthy is the new horse race in New Jersey. The Newark Star Ledger/Eagleton/ Rutgers poll shows Mr. Kerry’s lead has shrunk from 20 points to just 4. Why the drop?

I have long believed voters in the traditionally Democratic Connecticut-New York-New Jersey region harbor much secret pro-Bush sentiment since September 11, 2001. Nearly everyone there knows someone who lost a friend or relative in the World Trade Center attack. Folks in the region go about their business each day but deeply fear it could happen again.

These voters may not agree with Mr. Bush on social policies, but they quietly agree with him on the Patriot Act, which has caught hundreds of terrorists on U.S. soil and has already stopped numerous planned attacks. They may not be thrilled about the messy campaign in Iraq, but they like Mr. Bush’s toughness and unyielding single-mindedness in the war and on homeland security. Simply, Mr. Bush gives workers in this blue-state corridor great hope they’ll return home safely to their families each and every night.

Mr. Bush may not win these states, but he will score a much higher popular vote than four years ago. If he shows up in the New York area once or twice in the next six weeks, he could conceivably pull off a huge upset.

Of course, measuring stock market performance seems almost insignificant compared with getting loved ones home safely at night. But the stock market is not only a barometer of future wealth-creation, it has become a measure of future safety and security upon which wealth-creation depends.

In this light, a significant part of the political story is that broad stock averages have gone up 9 percent since mid-August (with growth-sensitive sectors like tech, consumers, financials, industrials, materials and energy leading the way). The bounce parallels Mr. Bush’s recovery in the polls.

All this undercuts another Kerry argument. There is no Hooveresque economy right now in the U.S. The stock market predicts continued solid economic growth as far as the eye can see. A full 140 million people are working, a new U.S. record. Unemployment is at a historically low 5.4 percent. Businesses are investing and consumers spending.

The economy may not be perfect. Homeland security may not be foolproof. But the polls and the stock market predict a strong Bush victory.

Lawrence Kudlow is a nationally syndicated columnist, chief executive officer of Kudlow & Co. LLC and CNBC economics commentator.

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