Mitt’s big next step on tax reform

Larry Kudlow Senior Contributor, CNBC
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While much attention has been turned to Newt Gingrich’s catastrophically mistaken attack on Mitt Romney’s work at Bain Capital, a potentially much more significant development occurred in the New Hampshire debate Saturday night. For the first time, Mitt Romney embraced a bold tax reform plan.

Under pressure from a number of supply-side conservatives (including me, and especially the editorial-page folks at The Wall Street Journal), Romney appears to be listening. Here’s his money quote from the debate:

But I look long term to do just what Jon [Huntsman] indicated, which is to take Bowles-Simpson and to reduce the rates in our tax code, to reduce the number of exemptions and limit the amount of exceptions that can occur. At the same time, I don’t want to raise capital-gains tax rates, as they do in Bowles-Simpson. But simplifying the code, broadening the base, is the right way to go for our tax code long term.

So far as I know, this is the first time that Governor Romney has endorsed the modified flat tax embodied in Bowles-Simpson. Jon Huntsman, who I think won the Sunday morning debate in New Hampshire, has endorsed this from day one, with three rates of 8 percent, 14 percent and 23 percent, plus a corporate tax rate of 25 percent (which Romney shares). The Wall Street Journal labeled this plan “exceptional.” Huntsman would blow out nearly all the deductions and exemptions in the code to properly broaden the base and generate additional revenues along with the revenue-generating growth impact of new incentives.

Up to now, Mitt Romney has been timid on tax reform. His plan has merely been to hold the six-bracket Bush tax plan in place while zeroing out the capital gains tax for those earning $200,000 or less. Romney’s people have suggested that the former Massachusetts governor would seek real tax reform after he’s elected president. But the Saturday night debate was the first time Mitt actually said it.

I spoke with a Romney insider who confirmed this to me, and felt that Romney has made a big next step toward campaigning on tax reform. I also have learned that Romney speaks every couple of weeks or so to top Republican congressional policy intellectual Paul Ryan, who himself supports a modified flat tax along the lines of Bowles-Simpson, but without any capital gains tax hike.

Actually, the Ryan-Romney relationship is a very important one. Ryan has not endorsed anyone in the presidential race so far. But Romney has endorsed the Ryan budget (as has Huntsman). And it seems that the Ryan-Romney conversations were at least partly responsible for Ryan’s latest Medicare reform plan, which is a Romney-like defined-contribution hybrid that leaves the existing Medicare program in place but crucially tacks on a menu of free-market choice for private insurance plans. One wonders if Mr. Ryan wouldn’t be the OMB director in a Romney administration. That is a very positive and enticing thought.

Meanwhile, it remains to be seen if Romney continues to talk publicly about a bolder tax reform plan, as he did in the New Hampshire debate. Right now, jobs and the economy are moving ever so slightly in President Obama’s direction. Should this continue, it would give the president a leg up on re-election.

So to make a winning case for the White House, the GOP has to do much more than just complain about the Obama economy. Republicans must be much bolder, with a growth message on tax, regulatory and entitlement reform. They must make it clear that if elected they will end the cronyism of excessive tax deductions, corporate welfare and government subsidies to big business and unions.

Mr. Romney has made a promising start with his economic message, but he has not yet gone into this level of detail.

Of course, Romney has worked successfully as a private financier and CEO. And out on the campaign trail, his attack on Obama’s European-like, social-welfare entitlement state is strong. He also contrasts Obama’s class-warfare message at every campaign stop with his vision for America’s soul — a merit-based opportunity society that rewards success, entrepreneurship and freedom.

But now it’s time for Romney to fill in the blanks on his economic message — and really start exciting the country.

Larry Kudlow is the host of CNBC’s “The Kudlow Report.”