- The Washington Times - Thursday, February 10, 2005

The mainstream media have already wasted reams of newspaper, not to mention thousands of trees, trying to decide if President Bush’s budget proposal is a deficit-reducer. Once again, they’ve missed the key point: The central defining aspect of Mr. Bush’s budget submission is that it is pro-growth.

I asked Josh Bolten, director of the Office of Management and Budget, if the president’s proposal to make the 2003 tax cuts permanent was in the budget. He answered yes. This is crucial to economic growth and deficit reduction. More, it signals Mr. Bush is not backing off. It sends an important message to Sen. Connie Mack’s tax-reform commission that a 15 percent tax rate on capital gains and dividends, along with abolishing the estate tax, is a high presidential priority.

Beyond this important threshold, Mr. Bush deserves credit for his toughest effort thus far to restrain federal spending.

Overall discretionary spending is aimed at slightly less than the projected inflation rate. Excluding homeland security and defense, discretionary spending actually falls in inflation-adjusted terms. There are tentative efforts to cut entitlement spending growth, especially in Medicaid. And the administration is finally waging war on farm-sector welfare queens.

Overall federal spending as a share of GDP is projected to trend around 19 percent. This is a historically low spending share of the economy. If maintained, more resources will remain in private hands to foster entrepreneurship, new business creation, jobs and wealth.



The deficit, meanwhile, is projected falling to about 1.3 percent of GDP from the current 3 percent over the next five years. This is well below European and Japanese deficits. If the U.S. economy grows faster than the 3.3 percent yearly estimate in the OMB baseline, the budget will balance in just half a decade.

More important, at lower tax rates, Treasury coffers are rapidly filling with rising tax collections. The Laffer Curve is alive and well. Over the last 12 months individual income-tax collections have increased 15 percent. Nonwithheld individual collections, which include stock market-generated capital gains and dividends, have increased 14 percent.

This didn’t happen on its own. In June 2003, the president signed tax-reform legislation that immediately lowered the top personal tax rate to 35 percent. Investment tax cuts were part of that reform. The economy’s recovery rate subsequently doubled from the new dose of supply-side incentives.

Mr. Bolten, sounding a lot like a supply-sider these days, is well aware of these developments. He notes that upper-income taxpayers are paying a larger share of total tax collections even while their marginal rate has been reduced. Hence, Mr. Bush’s first-term tax reform has led to even greater productivity, along with increased investment incentives and reduced tax evasion. Another supply-side policy experiment has succeeded.

Deficit teeth-gnashing will go on forever. But there is no evidence of any ill effect on the economy from temporary deficit increase to finance recovery investment.

Well-run businesses sometimes borrow to invest in future expansion. So must the federal government. The latest government statistics show private-sector GDP growth rising at better than 5 percent, while core inflation is a tame 1 percent. At 5.2 percent unemployment, the economy is moving steadily toward full utilization of the available work force.

Rubinomics — the idea of Bill Clinton’s Treasury Secretary Robert Rubin that deficits always cause bond rates to rise — is wrong once again. Treasury bond yields are only slightly higher than 4 percent, suggesting a 1950s scenario rather than a pessimistic future disaster.

The Bush administration has set down principled markers on economic and budget policy — namely that the surest path to deficit reduction is federal budget restraint and tax-cut-spurred economic growth. As the prosperity pie grows larger and incomes rise, revenues fill in the deficit gap while spending slows. It’s a growth, not an austerity, solution.

Fortunately, Mr. Bush will have two tough congressional enforcers to carry out his plan. Both Senate Budget Chairman Judd Gregg and House Chairman Jim Nussle are spending hawks. Look for them to drive tough-minded reconciliation instructions to keep weak-kneed appropriators on track.

Of course, all of this is a legacy of Reaganomics. The great President Reagan would have been 94 last Sunday. While his soul rests in heavenly peace, his vision and ideals are alive and well right here on Earth.

Mr. Bush deserves much credit for maintaining and expanding the Reagan vision. Spreading freedom and democracy abroad and ownership policies for more economic freedom at home, President Bush continues stoking the fires of liberty.

Lawrence Kudlow is co-host of CNBC’s nightly “Kudlow & Cramer” and is a nationally

syndicated columnist.

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