Where Jack Kemp was right

President Obama’s move to end tax provisions involving offshore money and other loopholes will trigger a legislative battle over his proposals, and a far larger and more profound review of the tax code. This review will be magnified by the enormous budget deficit that will require spending cuts and revenue increases well beyond what is being debated today.

Jack Kemp fought for economic strategies and policies that were pioneered by economist Arthur Laffer and adopted by President Reagan that were based on the notion that large tax cuts would stimulate growth by moving capital to growth-generating business.

{mosads}During Kemp’s period of greatest influence in the House of Representatives, I was working for the House Democratic leadership and had the opportunity to watch Kemp up close and personal, virtually every day, and be at the center of many of his policy debates.

I support the president’s latest proposal, and believe, for example, that offshore shelters should not be used to avoid taxes. When the economy recovers, I support increasing taxes on the highest incomes both as a matter of social equity and fiscal policy of reducing the deficit. However, there are not enough wealthy people to tax, or tax loopholes to close, to sufficiently reduce the mammoth budget deficits that may have been justified during a recession but pose great dangers during a recovery.

In two important ways, Jack Kemp was right:

First, tax cuts that direct capital to genuinely new-growth companies and sectors that will create future job waves and national growth make eminent sense. Not all wealth is equal. Wealth accumulated through speculation of paper assets and derivatives should be taxed at a higher rate than wealth accumulated through high-risk venture investment in new companies and sectors with major growth potential, which should be taxed at a lower rate.

Second, Kemp’s championing of enterprise zones, giving tax advantages to encourage business investment in distressed communities, makes great sense. Whether the targeted beneficiary is an inner-city community in a major urban center or a heartland American community suffering pain from distressed sectors such as autos, significant tax incentives for new investment promote significant economic growth and create substantial new employment.

Kemp was a pioneer in developing private-sector programs for progressive economic purposes. Creating new businesses and rebuilding distressed communities create new jobs and taxpayers that help the poor, the working class and investors alike.

All of us who have had any experience with the House Ways and Means Committee and the Senate Finance Committee are familiar with the debate over revenue models. Some believe that tax cuts lower revenue per se, in a stagnant model based on revenue lost through the tax cut. Others argue that a dynamic revenue model is correct because tax cuts can increase revenue by creating new jobs, new business and new taxpayers.

My former boss and economic mentor, senator and later Treasury Secretary Lloyd Bentsen (D-Texas), who was called a “progressive capitalist” in The New Republic, opposed much of Reaganomics. However, as a former CEO and investor, Bentsen believed that some incentives for business would fuel growth and jobs.

There is truth in both sides. The stagnant revenue model is more often correct, but in cases of rebuilding dramatically depressed communities, and creating dramatically fast-growth companies, some tax cuts do generate new revenue by dynamically creating new growth, business, jobs and taxpayers.

Congress would be well-advised to give preference to tax cuts that create growth, jobs and revenue, as well as tax increases that raise revenue by ending non-productive “loopholes” that cost money without generating growth.

The most important example is energy. Even during a deep recession, the price of oil remains above $50 per barrel. When the economy recovers, the price of oil will rocket back to $100 per barrel, possibly much higher.

The need for alternative energy appeared urgent not long ago when oil traded at $147 per barrel. It appears dormant today, with oil trading at $50 a barrel. Yet the need for alternative energy will suddenly become extremely urgent again once the economy recovers, as market forces and speculation will push oil prices upward very quickly. The problem is that the time-lag between new investment for energy, and new energy produced, is measured in years, while the timeframe for skyrocketing oil prices in a recovered economy is measured in weeks to months.

There would be dramatic growth from lower capital gains taxes for firms producing new energy, energy-conserving products, fuel-efficient cars, advanced medical research and environmental sustainability. Regarding these kinds of sectors, Jack Kemp was right that certain tax cuts will create new jobs, new companies, new growth, new taxpayers and new revenue to reduce the deficit, grow the economy and serve the nation in multiple ways.

Budowsky was an aide to former Sen. Lloyd Bentsen and Bill Alexander, then chief deputy majority whip of the House. He holds an LL.M. degree in international financial law from the London School of Economics. He can be read on The Hill’s Pundits Blog and reached at brentbbi@webtv.net.