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254 IRET Congressional Advisory 1 (2009)

handle is hein.taxfoundation/iretcgadv0251 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. May 5, 2009 Advisory No. 254 JACK KEMP, 1935 - 2009 Jack Kemp, the nation's leading advocate of pro- growth tax reform, passed away on May 3 at the age of 73. We will not see his like any time soon. Jack came from a middle class background. His father was in the trucking business. Jack was a football star in high school and college, and he became a pro quarterback after graduation. He persevered through stints with several pro teams, and eventually found a home with the Buffalo Bills, which he led to league championships. Jack had many fans as a great quarterback for the Bills. In turn, Jack was a great fan of the people. He had a profound faith that, given a chance, they would use their talents and energy to build a good life for themselves and their families. He won a seat in Congress on that platform in the election of 1970, and served nine terms. Taking on the establishment Jack entered Congress in 1971, at the beginning of the Nixon-Ford-Carter inflation and tax spirals. At the time, most economists believed in easy money, which supposedly would depress interest rates and thereby increase investment and employment. If inflation threatened, they preferred to reduce demand by raising taxes or trimming federal spending rather than risk a tighter monetary policy. Most politicians went along with these ideas. They favored easy money, and relied either on price controls and regulation (Nixon) or jawboning or rising tax rates (Ford and Carter) to fight inflation by mopping up excess demand. The traditional Republican response was to advocate cutting government spending to balance the budget and trim demand, in the hope that a lower deficit would also reduce interest rates to spur investment. In reality, Congress drove spending up, let taxes rise, and ran budget deficits. Congress relied on the Federal Reserve to accommodated the deficits by buying the added federal debt, in a vain attempt to hold down interest rates by increasing the money supply. As Milton Friedman and other monetarist economists predicted, the easy money held interest rates down only briefly before spurring inflation. The inflation raised tax rates on individuals (via bracket creep) and on businesses (by eroding the value of depreciation write-offs, overstating real profit). Growth faltered, and the deficit remained intractable. The deficit hawks were left wringing their hands and accepting the higher tax rates. The escalating tax rates did far more damage to investment and employment than the deficits ever did by making incremental work, saving, and investment unattractive, which contracted the supply of labor and capital. Investment failed to keep up with the work force, productivity slumped, and wages, especially after-tax wages, failed to keep pace with inflation. The economy was stuck ever deeper in stagflation. Contrary to the Keynesian economic wisdom of the time, inflation proved to be a disaster for job creation. The Keynesian model had collapsed. It had completely failed to anticipate the adverse effects of inflation and tax rates on the supply of labor and capital, and the supply of goods and services. g~em S I g6~ 8 Agg

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