THE NEXT FED CHALLENGE
February 11, 2008
Keynesian central planning has damaged the Federal Reserve Bank's credibility. It has weakened the dollar. Entrepreneurs and investors can't possibly plan ahead when interest rates bob up and down like yo-yos, says Lawrence Kudlow, host of CNBC's "Kudlow & Company."
We should say goodbye to Fed tinkering once and for all, and say hello to permanent enhancements to the economy's incentive structure, says Kudlow, who recommends:
- Lowering tax rates on corporations
- Lowering the corporate capital-gains tax rate.
- Abolishing the individual capital-gains tax, dividend tax and the estate tax.
- Eliminating the multiple-taxation of savings and investment.
- At some point, the entire corporate tax structure should be thrown out, along with all the murky K-Street tax-earmark loopholes that litter the Internal Revenue Code.
- We need to broaden the tax base and lower marginal rates; this is the key to maximizing future economic growth on the supply side.
Without strong tax-reform measures to expand the production of goods and services, further Fed money injections are only demand-side "solutions" that will surely inflate prices and depreciate the currency, says Kudlow.
Back in the 1970s, Washington policymakers were obsessed with increasing aggregate demand, but they forgot about aggregate supply. Today's short-term-stimulus rebate package is a throwback to that era, says Kudlow. It's not economic stimulus, it's political stimulus. Members of Congress up for re-election are trying to "do something" in response to primary-season exit polls that say Americans are totally unhappy with the economy.
But these rebates are budget busters. And how will Congress attempt to pay down $400 billion in budget deficits? Higher tax rates, of course. And then we'll really be back in the 1970s, says Kudlow.
Source: Lawrence Kudlow, "The next Fed challenge," Washington Times, February 11, 2008.
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