Sky-high taxes, overbloated budgets, a meddlesome government.

These are just some of the diseases affecting the US economy, and Larry Kudlow says they need a recovery-based solution. But not just any recovery—the 12 step kind.

So Kudlow proposed just that. What follows is his “Free Market 12 Step Path to Prosperity.” It’s his plan to put America back on track after the Great Recession. Whether it’s cutting those taxes, shrinking government or strengthening the dollar, he thinks this is the best way to rev up the economy and put Americans back to work.

So what exactly is Kudlow calling for? Click ahead to find out!

Posted 17 Sept 2010

Kudlow wants pro-growth tax reform, which he says is “necessary to unshackle business, investors, entrepreneurs, and incentivize and maximize economic growth, and by the way, simplify the entire out-of-control IRS system.” The first step in that reform in the institution of a “fairer, simpler flat tax.”

He thinks one or two tax brackets is enough, not six, at maybe 15% or 28%. Then we should broaden the taxable income base by ending deductions, credits, exemptions and subsidies. Also, income should be taxed once and only once at the source, and multiple taxes on saving and investment should be ended. Lastly, our annual IRS returns should fit on a postcard.

Rather than businesses paying a 35% tax on their profits, Kudlow recommends a corporate sales tax, net of expenses, of maybe 10%. Then he wants to broaden the taxable-income base, while ending deductions, credits, exemptions and subsidies. And this tax should be US territorial tax only, Kudlow said, not a global one.

President Obama has called for a new 100% tax deduction for capital investments—think machinery and other equipment—and Kudlow says it’s “a good idea.”But he wants to take the president’s plan one step further. Instead of allowing the deduction just through 2011, Kudlow wants to make it permanent.

Washington needs to keep its hands out of the housing and mortgage finance businesses, Kudlow says, “most particularly, Fannie and Freddie.”

We need tighter, more conservative lending practices and loan qualifications, Kudlow says. Specifically, he thinks a 20% down payment on all home purchases should be mandatory.

Home prices and sales should be allowed to correct on their own, Kudlow says. That means “no more government mortgage modifications, tax credits and other forms of disruptive housing stimulus.”

Kudlow wants all domestic discretionary spending should be frozen back to 2008, or pre-stimulus, levels.

Kudlow is calling for constitutional parameters on the size of government, specifically to 20% of gross domestic product. “It’s been that way on average for the past 40 years,” he says. “I don’t see why we can’t continue it.”

Under President Obama, though, that number has grown to 25%. And even under “optimistic economic assumptions” for the next 10 years, the number looks like it will stay at 24%.

With thousands of new regulations clogging up the economy, and cutting into corporate profits, Kudlow thinks that Washington should eliminate them all, especially Obamacare. “There’s too much red tape,” he says.

Kudlow also advocates the rollback of the new financial reform bill and the offshore oil-drilling moratorium.

“We needs rules,” Kudlow says, especially for the Federal Reserve. He thinks the central bank’s “stop-and-go fine tuning has really hurt us in the last 10 years,” including generating and popping the dot-com and real estate bubbles.

He proposes the adoption of the Taylor Rulefor inflation, which calls for interest rates to be set according to both real gross domestic product and inflation.

Kudlow’s not advocating a return to the gold standard, but he does want a US dollar linked to gold, which he called “the steadiest barometer of value.” In such a case, a dollar today would buy the same amount of goods and services as tomorrow. This static value would lend confidence to consumers, savers and investors and attract global capital. “Make money as good as gold,” Kudlow says.

“To me, lowering tariffs is like lowering tax rates, and it is totally pro-growth,” Kudlow says. “Consumers can shop around for the best-quality goods at the lowest possible prices anywhere in the world under a free-trade rule. That is the most pro-consumer thing in the world.” That, and free trade creates jobs.

As many as 17 million in the 1980s and over 20 million in the 1990s, according to Kudlow, thanks to the North American Free Trade Agreement.