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The Republicans Aren’t Quite There Yet On Growth

16672807371_72bc3fb85a_qBy Larry Kudlow

From Real Clear Markets:

The singular economic issue of our time is the quest for more rapid economic growth. In the past century the American economy grew at roughly 3.5 percent per year. That included huge booms and even worse busts, such as the Great Depression.

But over the past 15 years that growth has slumped to roughly 2 percent per annum. This has put average Americans in a cranky mood. They want change.

Though a list of current economic wrongs could go on forever, I see three major problems: an uncompetitive business tax code that blocks investment and job creation, a burdensome state-run regulatory apparatus, and an erratic monetary policy that has undermined the value of the dollar.

So, from the debates, how do the Republican presidential candidates stack up?

Most of the GOP candidates have pro-growth tax-cutting plans that would lower marginal tax rates on personal and business income. These plans would reinvigorate the incentive rewards for work, saving, and investment. Good.

But two candidates — Ted Cruz and Rand Paul — have proposed value-added taxes (VATs) on the corporate side. I think this is a big mistake, one that opens the door to big-government mischief.

By collecting VATs from businesses, and not listing them on customer receipts, the true costs for workers and consumers are hidden. The VAT also taxes labor and capital on top of existing burdens.

You can argue that these VATs are low, at 14.5 percent for Paul and 16 percent for Cruz. But like mushrooms and mustard seeds, these rates flourish once planted. (See Europe.) The Tax Foundation estimates that more than 70 percent of total taxes would eventually come from these hidden business VATs.

Simple and low flat-tax rates are a terrific idea. But not if supported by a VAT. And down through the years I have argued that if you want a sales tax, a consumption tax, or a VAT, you need to first repeal the 16th amendment, which launched the income tax. Otherwise, in the name of flat-tax reform, I fear we’d be opening the door to an even larger Leviathan.

This is why I prefer the more straight-forward corporate tax cuts of Jeb Bush and Donald Trump. They would lower the business rate to 15 to 20 percent, below China’s 25 percent, and would permit small S-corps to pay the lower C-corp rate.

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