And that brings me back to the tax problem. President Barack Obama is going to want another $600 billion or $700 billion in tax hikes. The recent bill already curbs high-end exemptions and deductions. But get ready—more is on the way from Team Obama. More deduction caps. Maybe a value-added tax. Maybe a carbon tax. Or maybe they just keep taxing the rich.
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And don't forget the Obamacare tax hikes, which are estimated to be roughly $1 trillion over the next ten years. That includes a 3.8 percent surtax on investment income above $250,000 per family, a 0.9 percent hike in the Medicare payroll tax (also a $250,000 threshold), a 2.3 percent medical-device tax, new caps on flexible health accounts, and an Obamacare haircut for medical itemized deductions.
In rough terms, when you add the Obamacare tax hikes on successful investors, earners, and small-business owners to the new fiscal-cliff bill, you're looking at a roughly 12 percent decline of incentive rewards from lower profitability and less take-home pay.
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Of course this is anti-growth. Of course this will reduce the long-term growth potential of the U.S. economy. And of course the added revenues will be spent, bloating the budget and reducing the economy's potential to grow.
It's a European economic model. And it's the exact reverse of supply-side economics. You can't tax your way into prosperity or a balanced budget. The economic pie grows smaller. Government grows bigger. Redistribution and government dependency grow more powerful and pervasive.
(Read More: For Obama, 'Cliff' Victory Also Holds Risks.)
And make no mistake about this: Economic growth is the key to reducing the spending, deficit, and debt share of the economy. Specifically, grow the GDP denominator with real personal and corporate tax-rate reform and reduce the demand for government dependency. That's the solution to our problem. A 20 percent spending rule would cure the problem even faster.
Unfortunately, we're going in the wrong direction right now.
—By CNBC's Larry Kudlow; Follow him on Twitter