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Trump Economic Adviser Larry Kudlow: The Fed Is Part of The 'Swamp'; Now Is The Time To Pass Tax Reform

Larry Kudlow, the conservative economist who helped write the Trump tax reform plan, says the Federal Reserve needs to stop worrying about inflation that doesn't exist.

Larry Kudlow, the conservative economist who helped write the tax reform plan for President Donald Trump, rallied an audience of elite technology service provider CEOs to get behind a bipartisan tax reform effort even as he referred to the Federal Reserve as part of the "swamp."

"As JFK said, 'A rising tide lifts all boats,'" said Kudlow, referring to how President John F. Kennedy pioneered supply side economics. "It has worked; it will work again. If we let it work. As far as the Federal Reserve is concerned, quit telling me growth causes inflation. I don't want to hear it. That is why I want a new Fed chairperson. I want to clean house. The Fed is part of the 'swamp,' and I come from the Fed."

Some economists have speculated that tax reform could lead the Fed to tighten monetary policy in a bid to stave off inflation.

[Related: Best of Breed 2017 Conference Coverage]

Should the tax cuts be approved, a Deutsche Bank analysis, for example, sees the Fed rolling out at least one or two more interest rate hikes than planned through 2019.

"We have to learn in the economics profession, the government and the 'swamp,' to coin a phrase, that more people working and producing and getting higher wages does not cause inflation," said Kudlow, who started his career as a staff economist at the Federal Reserve.

"People have been looking for inflation in the top right drawer, the top left drawer, underneath the desk, in the trash bucket and cannot find inflation, even the Federal Reserve," he said. "Mrs. Yellen gave a talk the other day and said the Fed's inflation models haven't worked for 20 years. …The only disagreement I have is the models haven't worked for 40 years."

CRN reached out to the Federal Reserve on Kudlow's remarks that Dr. Janet Yellen – whose four-year term ends on Feb. 3, 2018 – should be replaced as Federal Reserve Chairperson. The Fed had no comment.

Kudlow made the comments during a keynote address before 300 of the top technology service providers in the country at the 2017 Best of Breed (BoB) conference at Loews Hotel in Atlanta.

Trump's tax reform plan is on target and would spur a new era of economic prosperity, said Kudlow, a CNBC contributor and National Review Economics Editor. He said even those who disagree with Trump need to get behind the "common damm sense" economics that tax cuts will drive prosperity for all Americans.

"No inflation, big growth -- can you quarrel with that?" asked Kudlow, who has co-authored a book titled "JFK And The Reagan Revolution: A Secret History Of American Prosperity."

"You may hate Donald Trump's guts. I am not arguing that. I am just arguing a theory. I don't know why the Democrats can't do this. I was a Democrat. [Former President Ronald] Reagan was a Democrat. Kennedy's Democratic tax-cutting legacy has been written out of the party. It is a pity. We need both parties working together in bipartisanship."

The Trump tax plan would reduce the corporate tax rate from 25 percent to 20 percent and limit the tax rate on smaller pass-through businesses such as S corporations and limited liability companies (LLCs) to 25 percent – down from the current individual tax bracket rate of 39.6 percent.

The majority of strategic service providers are privately held, with the majority structured as S corporations, C corporations and LLCs.

Directly addressing a technology solution provider owner of an S corporation, Kudlow said the Trump tax reform plan would cut taxes for both C corporations and S corporations, which account for some 25 million independent businesses. "That is a huge chunk of the economy," said Kudlow. "The deal was 15 percent for the C corp, which has now kind of drifted up to 20 [percent]. Trump has drawn a red line on that, and I hope he stays with it. He's been very good at that. Regarding the small companies, because you are only taxed once, your rate won't go as low but in the House Plan – The Trump Plan -- it will be 25 percent. That is pretty good. You are paying 40 percent now."

Kudlow said the tax cut is critical to driving investment in businesses, which in turn will drive up wages for working people. "You want a good business, you need investment," he said. "If you punish investment, then the bet is off. It is not about fairness. It is not about rich people. I like rich people. The trick is to make the non-rich rich, open the door. That is the trick. That is pure Kudlow. So let's do it. I am going to be a little political here. That is what the president is trying to do. He may not do it to your liking. He may say things nobody likes. Do it, it will work. Why? Because it has worked in the past."

Kudlow said he advises Trump on economic policy but is not a close friend of the president. "I am not an intimate of his, though I know him pretty well," said Kudlow. "I don't mess with that side of it. I leave that to [President Trump's daughter] Ivanka [Trump] and [her husband, Trump Senior Adviser] Jared [Kushner]. I just say, 'Here is good policy economics and here is bad policy. You are right on target with your tax cuts, sir. You are right on target with your rollback on regulations. I am very worried about you on trade. Tariffs are taxes. They hurt consumers. But on the 15 percent corporate tax, immediate repatriation, 100 percent write-offs, on expensing new investment, I am all there. Hell, I wrote it. Get it done. Just get it done.'"

Kudlow, who is also the founder and CEO of Kudlow & Co., an economics research consulting firm, said he had asked Democratic presidential nominee Hillary Clinton and her team during the presidential campaign for 15 minutes of her time to convince the then-candidate to endorse pro-growth tax reform. "I believe if she had gone in that direction, it might have been a different outcome," he said. "Seriously. The folks in the Midwest and the Rust Belt heard Trump and liked his message on this stuff. But Mrs. Clinton didn't go out there in the last three to four weeks of the campaign."

Kudlow pointed out that key economic indicators are up since Trump took office. "Since the election – for whatever reason – the Dow Jones [Industrial Average] is up 24 percent, the S&P [500] is up 20 percent," he said. "If you look inside the stock market, it is the economic growth stocks that are doing the best. That is a great sign. …Tech stocks are up 30 percent; commodity stocks up 22 percent; financial stocks up 31 percent; industrial stocks up 21 percent."

A major theme of Kudlow's "JFK And The Reagan Revolution" book is that President Kennedy's tax cuts drove an uninterrupted economic boom – averaging 5 percent a year for seven years after inflation. Kudlow and his co-author, Brian Domitrovic, argue that the Kennedy tax cuts inspired Reagan's tax cuts in the 1980s.

"Under Reagan, the economy grew at 4.5 percent a year after his two big tax cuts and guess what -- that growth generated higher incomes and actually more taxes – the revenues went up," said Kudlow, who was associate director for economics and planning in the Office of Management and Budget during the first Reagan term. "When we raise taxes, the growth goes down, the revenues go down. I am a complete contrarian on this. You want more revenues to spend for health care and Social Security? Grow the economy. Not with high taxes but with low taxes. You want your businesses to rebuild? Stop punishing them."

Kudlow said his call for tax cut reform is not a "Republican riff" or a "Democratic riff," but simple common sense. "If you are overburdening business with regulations and taxes and God knows what, as we have in both parties, what do you get?" he asked. "You get lousy business. So the job picture deteriorates, the wage picture deteriorates and the family picture deteriorates."

Several solution provider CEOs interviewed by CRN said they are 100 percent behind the tax reform proposal.

Terry Speigner, president and CEO of NGEN, a Lanham, Md., solution provider, said he is "praying" the tax cut reform will go through so he can drive more investment in his $8 million, 30-employee business. He believes the tax cut would give him the cash to double the size of his business to $16 million.

"We want to reinvest in our business and grow," he said. "I have the government taking 40 cents out of every dollar and I have to pay taxes to the federal government, state of Maryland, Washington, D.C., and the state of Virginia in addition to my local county. When I look at my $400,000 tax bill, that deflates me. That takes away money I could be investing in my company."

Speigner, whose business is an LLC with an S Corp selection, said his tax rate would go from 42 percent to 25 percent under the proposed tax reform bill. That would take his taxes from $400,000 to $250,000.

Speigner, a onetime Democratic leader who said he is nonpartisan, wants the government to focus on tax reform and reducing health-care costs. "I pay 75 percent of my employees' health insurance across the board," he said. "That is costing me almost $20,000 a month just in health-care costs."

Michael Haley, president of Edge Solutions, an Alpharetta, Ga., solution provider, No. 333 on the 2017 CRN Solution Provider 500, said he would plow any savings from tax reform back into his business. "We would take all of that money and hire other people," he said. "It is crazy when there is talent out there we want to bring on board. Right now at the end of the year if we have any cash left over, we have to give it back to the government instead of hiring people."

Haley said his effective tax rate is currently about 40 percent a year. "If we saved 15 percent in taxes on $1 million, we could hire a couple more people," he said. "Then profits will go up and we can hire more people and grow the business and create taxpayers. Whether you are a Reagan Republican or a Kennedy Democrat, anything that lowers corporate taxes is good for everybody."

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