Shortly after testimony by Federal Reserve Chairman Alan Greenspan, Empower America co-director Jack Kemp made the following statement:
“Fed Chairman Alan Greenspan just made lower marginal income tax rates and a lower capital gains tax rate politically feasible and an economic imperative. A bipartisan coalition to cut tax rates significantly across the board is now inevitable.
“It sounded like a sonic boom rolling across Capitol Hill today as the Fed Chairman knocked the pins out from under what had been a prevailing ill-conceived and counter-productive consensus that, because we should be on a crash course to retire the national debt, there is little room to cut tax rates. That misguided notion has kept Congress in a stalemate over taxes for more than three years now, and today Alan Greenspan made it possible to break the stalemate.”
In testimony before the Senate Budget Committee this morning, Federal Reserve Board Chairman Alan Greenspan totally demolished the harmful idea that it is desirable to keep tax rates higher than they need to be to operate the government so that enormous budget surpluses can be generated to retire the national debt as soon as possible.
Chairman Greenspan told Senators that excessive budget surpluses are undesirable: “Excessive surpluses, like excessive deficits, distort the structure of private economic growth, and that’s bad.”
Kemp responded, “Wow! What a profound observation. It was like Mr. Greenspan took Congress by its collective shoulders and tried to shake it out of the debilitating debt-retirement mania that has been distorting congressional judgement about cutting tax rates for too long. What the Chairman understands and so many other policy makers have missed is that although the debt held by the public rose by more than 50 percent from 1990 to 2000 (from $2,410 billion to $3,633 billion), the debt burden on the economy actually fell from 42.4 percent of GDP to 34.6 percent because the economy grew faster than the debt during the same period.”
Instead of rushing on a crash course to retire the debt as quickly as possible, Mr. Greenspan called for a “glide path” to debt retirement that would accommodate significant tax rate reductions, and in particular spoke favorably about cutting marginal tax rates. He emphasized that the best fiscal policy does not mindlessly seek the lowest possible level of debt in the shortest possible period of time, but rather seeks over the long run to maintain balance in the operating accounts of the government.
Greenspan emphasized his belief that budget surpluses and budget deficits have in common the undesirable effect of draining resources from the private economy that could be put to better use by private businesses and entrepreneurs. The best long-term fiscal policy, he said, is one that maximizes long-term economic growth, and the way to do that is to avoid excessively high tax rates that drain resources out of the private sector. The Chairman went on to be supportive of reducing marginal tax rates as low as possible to be consistent with economic efficiency and spending priorities.
Kemp concluded, “If we want the economy to remain on a non-inflationary, high-growth path long after this economic slowdown is over, we must increase the after-tax rate of return on productive activities. The way to do that is expand the tax legislation now under consideration to include larger marginal tax rate reductions, capital gains inflation indexing and a reduction in the capital gains tax rate, AMT reform and an expansion of IRAs and 401(k) retirement accounts. Thanks to Alan Greenspan, the door is now open to realize that goal this year, and President Bush has been vindicated in his persistent determination to go against the false conventional wisdom that the American ‘don’t want or feel they need’ a tax cut.”