What follows below is a transcript of my recent interview with top Obama economic advisor and University of Chicago economist, Austan Goolsbee, from the Democratic convention. Austan is a marvelous person, a good friend, and a terribly bright and talented economist. But as I recently wrote, I do question the Obama economic model. Simply put, raising marginal tax rates will minimize -- not maximize – U.S. economic growth and jobs. Ditto for enlarging the size, scope, and sweep of government.
Kudlow: All right, continuing our discussion about investor worries, and portfolio worries, that we’re about to see a return to big government economics, we’ve got our great friend Austan Goolsbee, top economics advisor to Barack Obama. Economics professor at the University of Chicago. First of all Austan, you are a sweetheart for doing this. I appreciate it.
Goolsbee: Hey, my pleasure.
Kudlow: All right, it is great to see you. Now look, you saw the Wall Street Journal page one article, we’ve quoted it a lot, a possible return to big government we haven’t seen in many decades. Austan, I know you have made the case that yours is an economic growth plan. I appreciate that that is your point of view. But when you see it in the full light of day, the higher taxes, the higher spending, the more regulating, people are asking tough questions Austan. What can you say?
Goolsbee: That thing was a hatchet job, and it was totally inaccurate. If you look at the Obama plan, it is a net tax cut, as I’ve said on your show many times, paid for by a net spending cut. And Barack Obama has been far more specific about how he would cut spending than has been John McCain. Drawing down the war in Iraq, cutting the direct subsidies for private Medicare providers which has proven to be less efficient than regular Medicare. Cutting the direct subsidies to student loans, which have proven to be less efficient than the government’s own program. Contracting reform, rolling back earmarks, it adds up to hundreds of billions of dollars of spending cuts. And that’s the way he does it. So…
Kudlow: But Austan, everybody’s…
Goolsbee: …this article is totally inaccurate.
Kudlow: All right, I appreciate your disagreement with the article. But there’s a whole bunch of think tanks and non-partisan guys, National Taxpayers Union, the Tax Foundation, they’re saying you’re up to $600 billion in spending. And I just want to ask you…
Goolsbee: Ooohhhhh…You’ve got to be kidding me.
Kudlow: …Austan, on the basic incentive model, if you’re raising tax rates on successful earners, and I think one of the Tax Policy center people said $165,000 dollars and up for singles, aren’t you essentially removing money from the private sector, giving it over to the government, and letting the government direct the economy…
Kudlow: And isn’t this the quicksand…
Goolsbee: Noo. Nooo. Noooo!
Kudlow: …that we found ourselves in the seventies Austan?
Goolsbee: Noo. Noo. We’re talking about for couples making more than $250,000 a year, singles making more than $200, that the rates would go back, at most, to what they were in the nineties. And for a lot of the rates, to significantly less than what they were in the nineties. There was no evidence that that sent us into an economic tailspin in the nineties. And there’s no suggestion that it would today.
And Larry, I’m kind of surprised, because I know you’re a man who doesn’t like increasing marginal rates, but the McCain plan, his health plan, would tax your health insurance as ordinary income. That would induce bracket creep. It would drive up the marginal rates of tens of millions of people. And the Congressional Budget Office says that would raise the effective marginal rate of the country by more than repealing the entire Bush tax cuts.
Kudlow: I actually…look, there are issues in the McCain transition. But all he’s trying to do is shift it from employer based to individuals. And he does have very substantial tax incentives for that, although it’s a work in progress. But let me read you…
Goolsbee: Yeah, but he pays for it with a tax increase.
Kudlow: Only for the very, very top who already have insurance.
Goolsbee: Noo. Noooo. No, $3.6 trillion.
Kudlow: We don’t have time to go down that, let me just read you…
Goolsbee: All right.
Kudlow: …one of my favorite quotes, from one of my favorite supply-siders. His name is John F. Kennedy. And here’s what he said…
Kudlow: …I believe in 1962. “In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the rates now. The purpose of cutting taxes now is not to incur a budget deficit but to achieve the more prosperous, expanding economy, which can bring a budget surplus.” Austan Goolsbee…
Goolsbee: And I totally agree with it.
Kudlow: I know you do, but I say your man is not being true to JFK.
Goolsbee: No, you forgot, you forgot to mention that the marginal rate was 91 percent when he said that. We absolutely would cut the rate if it was anything like that…
Kudlow: How high would you go?
Goolsbee: …all we’re talking about is rates going back to the…
Kudlow: How high would you go?
Kudlow: Because some people say, when you include the proposal to raise Social Security and payroll tax, for these [inaudible]...
Goolsbee: That’s not until 2019.
Kudlow: …you’re gonna run it up to 50 or 60 percent on the marginal tax rate.
Goolsbee: Noo. Nooo. Noo. That’s not until 2019 at the earliest. The top marginal rate would be 39.6. People making less than $150,000 would get a substantial tax cut. And everyone below $250 would not see any rates go up.
Kudlow: And when those refundable tax credits are phased out, doesn’t that bump up the marginal tax rates?
Goolsbee: It just depends how you do the phase out.
Kudlow: Austan Goolsbee, do you believe in the supply-side model?
Goolsbee: Which part of it? I believe the supply-side is important. But I do not believe that by cutting rates, when the rates are as low as they are now, that you would generate revenue. No.
Kudlow: All right, University of Chicago, Austan Goolsbee. You’re terrific to come on. I really appreciate it. We’re gonna see you in Minneapolis…
Goolsbee: Always a pleasure, Larry.
Kudlow: We’re gonna see you in Minneapolis-St.Paul.
Kudlow: All right my friend.
Goolsbee: Consider it done.
Kudlow: All right, you got it.