I had a chance to chat with Rudy Giuliani this weekend, on Saturday morning, just after he finished with his "tax summit" campaign event in Manchester, N.H. There, Giuliani offered his case for making the Bush cuts permanent, killing the estate tax (or "death tax," as he puts it), indexing the alternative minimum tax to inflation, and lowering corporate taxes. The easy-reading, truncated version of the interview can be found here. But lucky CapCom readers get to peruse the longer "director's cut." No Iraq, no abortion, no immigration—just hardcore economic policy. Giuliani speaks at length about taxes, Social Security, and the mortgage crisis. But since you're likely to be Giuliani-ed out by the end, I am giving my analysis upfront. My takeaways are as follows:
1) Giuliani's answer as to why the high-tax Clinton era doesn't provide a good economic roadmap was a bit thin. (For a meatier answer, see my chat tomorrow with Steve Forbes, Giuliani's economic adviser.) It may suffice during the primaries, but Hillary Clinton, especially, will come ready during the general campaign with loads of wonderful economic numbers from the Clinton boom and will credit the 1993 tax hikes for the great economy back then, arguing that getting rid of the Bush tax cuts won't hurt the economy at all.
2) With Fred Thompson, in particular, focusing on entitlement reform when he enters the race, Giuliani's "trust me" answer on Social Security reform probably won't survive without the mayor at least spelling out some general principles. But he may well be right that there is a compromise out there waiting to be had. (Check out this one for some idea what a deal might look like.)
3) Giuliani is never better than when talking passionately about his record as a tax cutter and urban turnaround artist. And I can see the television ads now. The black-and-white (of course!) scenes from the pre-Giuliani era are going to look like outtakes from Escape From New York, while the Giuliani-era scenes are going to show the beautiful, high-def Big Apple ("It's morning again in Manhattan") depicted in 2002's Spider-Man.
Anyway, here is my chat with The Mayor:
The Democrats are going to say, "We raised taxes in the '90s, cut the deficit, and the economy boomed." Why not try and rerun the '90s instead of cutting taxes?
Because we have actually done more job creation by lowering taxes than by raising taxes. We have more jobs in this country than we had in the, gosh, in the foreseeable past. Jobs have grown. We're down to—I always hate to say—"virtual full employment." Economists would say that—at 4.6 percent. It's really quite remarkable. We've had so many continuous quarters of growth now against situations that could hurt us, and the proof is in the pudding. The federal government is collecting 21 percent more revenues from the lower taxes than the higher taxes. And when they argue with me about this, most of them are arguing about theory—meaning the Democrats. They've never done it. They've sat in a legislature somewhere and debated. I actually did it. I actually did what I'm talking about. I'm not talking about this from the point of view of theory. I actually did it. I lowered taxes at a time in which we were in economic distress, when we had major deficits, major job losses, 10 percent unemployment, a city that people thought was gone, "the unmanageable, ungovernable city" and on the front page of Time magazine they had "The Rotting of the Big Apple" ... and I turned the city around. It was a great decision as far as even getting revenues was concerned. I cut income taxes by 24 percent in rate. And I was collecting 40 percent more from the lower taxes than the higher taxes. I used to carry around a chart to prove this to Democratic legislators who I had to get to agree with me. Honestly, they cut along with me, they had to vote for it. I led a lot of the charge for it. We cut the hotel occupancy tax by 34 percent, and within a short time we were collecting a $100 million more from the lower tax than the higher tax. And I would say, "If you keep going with me on this, we can actually raise more revenues, but we'll do it on the positive side. We're not raising revenues for government and lowering jobs. We're raising revenues for government, and the private sector is booming." And what happened to unemployment with all those tax decreases that I did in New York? Unemployment went down by half. And the same picture emerged after [President John] Kennedy. This is just not Republicans.
You're a student of history. What conclusion do you draw from the cuts in the '60s, '80s, and this decade?
The Kennedy tax cuts led to the same results of the Reagan tax cuts and the Bush tax cuts. One of the worse tax increases in the history of this country was by Herbert Hoover. They all got frightened with the stock market crash. Taxes got raised, tariffs got raised, and they took what could have been a cyclical problem and turned it into a long, 10-, 12-year problem.
Under current congressional budget rules, tax cuts must be paid for by budget cuts. How would you deal with that?
I could give them endless numbers of budget cuts. I never ran out of budget cuts when I was mayor of New York City. In New York City, I had a 40 to 50 billion-dollar budget, and that was like the third or fourth biggest budget in the country at the time. A budget of that size, you can find budget cuts everywhere in the budget. The next president should work at budget cutting for eight years and not run out of them. I'll give you one big one: 42 percent of the federal workforce is coming up for retirement from now until 10 years from now, which would effectively be at the end of the next president's term if the president has two terms. You could not rehire half of them, and that would save you between $20 [billion] to $25 billion. It's a good start, and it would also be a good discipline because we would get all these agencies to do what businesses have done. It would get all these agencies to do more with less and take advantage of new technologies. What's the advantage of a new technology? The advantage of a new technology is that one person can do the job of three. Agriculture is doing that.
What do you think would happen to the economy if the Bush tax cuts were all left to expire?
The economy begins to go in decline. I think we see an outsourcing of jobs. We see a loss of revenue. I think we see it before then. I think we start seeing it in 2008, 2009. I did a forum on taxes just now, and a guy who runs a medium-size business was saying he's already starting to hedge his bets against the idea of a major tax increase in 2010. I mean, how many businesses plan three, four, five years ahead?
What's the logic behind cutting corporate taxes?
Suppose you're planning now where to put your business, in the United States or in Ireland [where corporate taxes are low], or where to put your business, in the United States or in France, and you've got a presidential race going on in the United States of America and one side that could win that race is saying, "We are going to raise taxes by $3 trillion"—which is what the ultimate number would be—or they look at rates more, "We're going to raise the rate from 35 to 39.6 percent" or, "We're going to raise capital gains from 15 to 20 percent," or one of them says from 15 to 28 percent and he's reading [French President Nicolas] Sarkozy's book, Testimony, and he hears Sarkozy saying, "I'm going to reduce rates." Sarkozy wants to reduce the corporate rate even though it's already lower than the United States. Only Japan has a higher one. So if you're making choices like that now and it takes you two, three years to build your factory or it takes two, three years to build your office building, I have to imagine if we're not losing business already, we're starting to.
How will you get this done?
I'm taking this in two stages, both in terms of the campaign and how I would do it as the president. The first thing I want to do is lock in a permanent tax rate so businesses have something they can do for planning. So I want to lock in the marginal tax rates where they are. The only tax we're proposing doing away with right now is the "death tax." I am calling for the absolute elimination of that. We're going to look over the next three or four months for more detailed proposals, and one of them is a more simplified tax form that makes it easier for people to file. Another is, can we sustain, once you get past 2010, can we take a look at some prospect of further tax cuts? You'd have to, I believe—though I am open to looking at other possibilities—that you would have to peg the individual and corporate rates at pretty much the same levels. If you brought one down, you'd have to bring the other down. So we'd have to look at how much room we had for that. But that's the kind of thing I would be looking at: Let's get it locked in where it's at and then look at how we can lower taxes.
What's your plan to deal with Social Security?
Social Security I am going to put in the following category because I know what a political trigger it becomes and how Democrats use this against Republicans. Social Security, I'm going to say, and I mean this, Social Security is something we can straighten out if I get elected. I believe Social Security will be straightened out if almost anybody else gets elected. I don't think this is one of the critical things that only I can do, because I think Republicans and Democrats are willing to agree on Social Security once they get themselves out of a presidential race where Democrats are hoping to hear one of us say that we're going to reduce Social Security so they can do commercials saying we are going to hurt elderly people. And Republicans may be hoping the Democrats are going to say something where they can say they're going to bankrupt the country. And the reality is that neither one of us is going to do that. There are several solutions to Social Security that could get bipartisan support, but if either side comes out supporting it, it's going to get wiped out in all the political finger-pointing that is going on. There is too much history here. It should be done. Someone should get elected and put together five Democratic and five Republican senators and tell them, "Give me two options, three options, and then we'll negotiate it out." And I should tell you my style of working with a legislature. I always proposed more tax cuts than I got, and I always proposed a multiple-choice list of tax cuts because I was willing to deal with a Democratic legislature and Democratic City Council. If you don't want to lower the one I want to lower, maybe there is one you want to lower, and we can make a deal. Maybe you like a lowering of the sales tax, and I like lowering the income tax. Maybe I won't lower the income tax as much as I want and you'll get to lower the sales tax, and we'll make a deal. So if you look at my record, you'll see I proposed something like 64 tax cuts and I got 23 of them passed. That's way beyond any mayor in the history of the city and just way beyond anybody else in government at the time.
Do you think the government should be doing anything to help homeowners affected by the subprime mortgage crisis?
Right now the president should be watching it very, very carefully, but what he should really be watching carefully is not only what's happening in the housing market but the fundamentals of the American economy and making sure they're all there and operating correctly. This would be a great time if you wanted to stimulate the entire market for Congress to agree to make the tax cuts permanent. You'd send a ripple effect of confidence through our markets that would be better than any bailout you could do for anybody. That would be bailing people out through strengthening the American economic system rather than weakening it. I think the Fed has a big role to play, a very sensitive one, and I don't think us politicians should be telling them what our recommendations are. The Fed being independent is a great thing. Another thing government could do is a bipartisan agreement on lessening some of the regulations, some of the excesses of [the] Sarbanes-Oxley [corporate reform law], some of the other regulatory burdens. Like a tariff is a tax, a regulation is a tax also. And regulation should be moderate and sensible.
How about greatly expanding the child tax credit to attract social conservatives?
We should take a look at this, but right now we should make sure we preserve it. What's at stake right now with the Bush tax cuts is that the whole thing goes in 2010.