(The following is a transcript from my interview earlier this week with former Texas Senator Phil Gramm. As I recently wrote, Mr. Gramm is a “a strong, zealous, free market advocate…staunch free trader, a tax cutter, budget cutter and entitlement reformer.” He also happens to be GOP presidential hopeful John McCain’s top economic advisor.)
Kudlow: Senator Gramm it is great to see you. Thanks for coming on the show.
Gramm: Thank you.
Kudlow: Alright. Senator Gramm, let me ask you this: As you, and Mr. McCain, and everybody head into Michigan, which is one week from tonight—Michigan boasts the first in the nation unemployment rate, 7.4 percent—let me ask you, will Senator McCain alter or expand with some new economic policy proposals going into Michigan?
Gramm: Well, I think the main thing Michigan needs to do is to stop spending and stop taxing. I think McCain is going to go into Michigan and talk about dramatic reforms of training and unemployment insurance. I think he’s going to present a coherent and new program. And I think he’s going to talk about the obvious fact: And that is, if we had combined the Bush tax cuts with fiscal restraint, we would have a surplus today. And we could be cutting taxes again. We could be eliminating the dual taxation of dividends. We could be providing more incentives for jobs growth and opportunities. But because we let spending get out of control, now we find ourselves with big deficits and we find ourselves with a shaky economy.
Kudlow: But in fact, in fact, the deficits have come down substantially. I think you would agree that’s a factoid. I mean, what are they 1.5 percent, almost 1 percent of GDP. So let me ask you. You’ve outlined an interesting plan. Will Senator McCain, are you proposing to Senator McCain, a broad based spending reduction plan, along with tax reform to grow the economy and keep the size of government contained? Are you going to unveil some new ideas on those fronts?
Gramm: I think the answer to both is yes. I’m for John McCain because I think he has character. And I think character is important in a president. It was for Washington. It was for Reagan. I think he has a moral authority as commander-in-chief that no one else has. And we need that. And I’m for him because I know he will veto spending bills. I know he will stop the spending spree. I know he will make the Bush tax cuts permanent. And I know he’ll start addressing other things in the tax code that need to be improved.
Kudlow: Will Senator McCain get behind a corporate tax cut? Take a state like Michigan. There’s a new study out by the U.S. Treasury, which confirms a Congressional Budget Office study. If you slash the corporate tax rate, get it back into equilibrium with the low European rates, 60 percent of the benefits, at least, would accrue to the wage earners and the workers, which seems like a Michigan message and a national message. Are you advising Mr. McCain to cut the corporate tax?
Gramm: I think it’s something that’s being looked at. I think my primary focus, I think the Senator’s primary focus—which is the important thing, he’s going to be the candidate, not me—I think his primary focus is going to be to end this deficit, and do it quickly. And to make the Bush tax cuts permanent.
I think we’re being hurt by several things. I think we’re being hurt by the fact that there’s uncertainty about the tax code. We have repealed the death tax and yet I would guarantee you that almost all of your listening audience is still engaged in activities that are costly and inefficient trying to avoid a tax they believe is coming back. We don’t know what the capital gains tax rate is going to be, three years from now. We don’t know what the rate on dividends is going to be. We don’t know what the top rate is going to be. And 85 percent of the income taxed at that rate comes from small businesses. So I think there’s tremendous uncertainty.
I think we could do a lot more in deregulation. Earlier you were talking about that we have deregulated. The plain truth is we have had a growth in regulation—especially in the financial sector. We have lagged behind the rest of the world. We’ve done less privatization than any other major country in the world in the last few years. There’s a lot that can be done.
Kudlow: We’re going to leave it there. Senator Phil Gramm, I hope you’ll come back and give us a progress report on the McCain economics plan. It’s good to see you, sir.
Gramm: Well listen, if he wins, you’ll just be able to look at the economy and it’ll give you the report.