Larry Kudlow

Some folks argue that rising inflationary pressures would offset these benefits. But that’s nonsense. Inflation is the most overrated issue out there. Even when you factor in energy, headline inflation for 2007 is going to come in below the prior year while inflation for 2008 should be even lower than that.

Back in 2000-01, when the economy was slowing markedly, the Fed obsessed about inflation. They were wrong, and then took a radical u-turn. It can’t be the same story again. The money supply hasn’t grown in a few years while inflation is poised to go way down. The Fed must act, and act big. After that, elected Washington can do the rest.

Right now the single best thing President Bush and Congress can do is slash the corporate tax rate for large and small businesses. Bush must reach out to Charlie Rangel and move the corporate tax to 25 percent from 35 percent. Then, instead of taxing successful capitalists as an offset, Congress can entirely abolish corporate-tax subsidy loopholes, special provisions, and other corruption-inducing K-Street earmarks.

A middle-class tax cut to help families and small businesses would also work wonders. This can be done by collapsing the three middle-income tax brackets of 15 percent ($15,650), 25 percent ($63,700), and 28 percent ($128,500) into one 15 percent bracket. These brackets apply to small-business owners who may be suffering the high costs of energy and raw materials. The biggest weakness in the jobs report is the household survey which is comprised of these owner-operated small businesses. Household job increases have slumped to only 262,000 over the last year.

A major cut in the corporate tax and a simplification of the middle-income tax brackets makes good economic sense. It would help the current softening of the economy and increase America’s long-run potential to grow. This is a good plan for President Bush as well as the GOP candidates on the campaign trail. It sure as hell beats talking the economy down.

America is an optimistic country, and for the life of me I don’t know why the Republican presidential candidates can’t understand this. If a few things go wrong we can fix them. That’s what the Fed is there for and that’s what tax policy is there for.

Just because Goldilocks is alive and well, it doesn’t mean she can’t use a bit of help.

Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.