We have published a new report which can be found at:
SOTU First Thoughts: Republicans Must Do Better
President Obama highlighted his new centrist political strategy last night, which includes support for reducing the corporate tax rate. Unfortunately, he argued that such a reduction must not increase the deficit. The President certainly does not believe in the economic power of increasing incentives for investment. In 2009, the U.S. government raised nearly $140 billion in revenue from the corporate tax. If the government reduced the corporate tax rate to zero, the resultant growth in the economy would, without question, easily pay for the government's $140 billion in annual revenue loss. The growth wing of the Republican Party must counter the White House's misconception here.
And this is why we were so disappointed with Paul Ryan's response last night. Ryan emphasized our country's ‘crushing burden of debt' that ‘no economy can sustain'. We like Ryan, but he is wrong -- economically and politically.
Research by Louis Woodhill shows quite clearly that should the long-term growth rate of the U.S. economy increase just a little bit, to say 3.9%, the federal government could easily afford its current expenditures and long-term entitlement programs.
And the GOP seems to be reverting to its old political mistake that Jude Wanniski identified in his Two Santa-Claus Theory of modern American politics, which has held true for the last century:
For the U.S. economy to be healthy and growing, there must be a division of labor between Democrats and Republicans; each must be a different kind of Santa Claus....The Democrats, the party of income redistribution, are best suited for the role of Spending Santa Claus. The Republicans, traditionally the party of income growth, should be the Santa Claus of Tax Reduction. It has been the failure of the GOP to stick to this traditional role that has caused much of the nation's economic misery. Only the shrewdness of the Democrats, who have kindly agreed to play both Santa Clauses during critical periods, has saved the nation from even greater misery.... It isn't that Republicans don't enjoy cutting taxes. They love it. But there is something in the Republican chemistry that causes the GOP to become hypnotized by the prospect of an imbalanced budget. Static analysis tells them taxes can't be cut or inflation will result. They either argue for a tax hike to dampen inflation when the economy is in a boom or demand spending cuts to balance the budget when the economy is in recession. [emphasis ours]Last night could have marked a critical inflection point for the economy and the stock market if Ryan had properly countered President Obama's position on corporate taxes. Instead, he seconded Obama's concern on public finances, and thus, the Dow is up only 30 points this morning. While both parties are far from reaching a Hooverian consensus of deep spending cuts along with tax hikes in an effort to tackle the nation's debt, such rhetorical common ground makes it more difficult to achieve substantive tax reform.
If Republicans are going to focus on spending, they should, as this morning's Wall Street Journal does, focus on the difference between Keynesian stimulus programs by the government and classical economic stimulus that empowers producers in the free market to allocate capital. This was part of what the electorate demanded last November; it was not 'shrinking government' as Charles Krauthammer said last night.
The rest of the voters' message last November was a repudiation of the 2010 healthcare reforms and the Fed's mismanagement of monetary policy. Republicans must improve from here, or the political momentum they enjoyed months ago will fizzle.