By making capital less valuable and more expensive, you get less of it. And you can’t have entrepreneurial capitalism without capital. Higher capital costs block business formation, productivity, jobs, and incomes.
Frankly, in terms of long-run economic growth, taxes on capital investment are more important than income taxes. On top of that, every time the capital-gains tax rate is raised, it generates lower long-run revenues. But if you cut the rate, revenues soar. Just ask Bill Clinton, whose second-term capital-gains tax cut led to a budget surplus.
And nobody is even talking about spending. The original across-the-board sequester, which was supposed to slash $1.2 trillion from the budget, is off the table. Apparently, $50 billion is the new number. So let me get this right: a $500 billion tax hike, and a $50 billion spending cut. That’s revenues-over-spending by ten-to-one. Wasn’t Simpson-Bowles looking for $3 or $4 in spending cuts for every $1 of new revenues?
So, it looks like way too many tax hikes, way too few spending cuts, and a big anti-growth fiscal package that is more like European-style austerity than American-style, free-enterprise recovery. This is why the stock markets are so nervous. They don’t know what they’re gonna get.
Right now, stalemate is just as likely as solution.
Larry Kudlow is the host of CNBC’s “The Kudlow Report.”