Kudlow: Why Obama doesn't get common sense economics

Speaker of the House John Boehner (R) listens to President Barack Obama deliver the State of the Union address on January 20, 2015 in the House Chamber of the U.S. Capitol in Washington, DC.
Getty Images
Speaker of the House John Boehner (R) listens to President Barack Obama deliver the State of the Union address on January 20, 2015 in the House Chamber of the U.S. Capitol in Washington, DC.

It's too easy to label President Obama's State of the Union as more "tax-the-rich" and redistribution. We already know that. Rather than name-calling, Republicans must draw a clear line in the sand between their worldview and Obama's.

I'd call that line common sense economics.

There are a few rules of thumb to keep in mind. First, you can't create a new business, or sustain an existing one, without the seed corn and nourishment of capital investment. Secondly, only businesses create jobs. You can't have a job without a business.

Third, jobs create all incomes, including middle-class incomes. Lastly, incomes create family and consumer spending. Got all that?

This is not complicated. It's common economic sense, but University of Chicago economist Casey Mulligan states this in a simpler way: Growth starts with investment and ends with consumer spending.

Regrettably, Obama doesn't get this. That's why he's proposing the third capital-gains tax hike of his tenure. He started at 15 percent, went to 20 percent, with Obamacare took it to 23.8 percent—and now wants 28 percent. This damages business, jobs, and middle-class incomes.

Read MoreObama's speech strategy: Put GOP on backfoot on taxes

Ironically, history shows that lower capital-gains tax rates produce higher revenue. Think Bill Clinton and George W. Bush. But a higher capital-gains tax produces lower revenue. Think late-Reagan, Bush Sr., and now Obama.

Obama also proposes to raise the tax burden on capital by increasing inheritance and estate taxes. And he's making another attempt to tax banks—only this time he is adding in asset managers and insurance companies. Ironically, a huge part of Obama's base—police officers, firefighters, teachers—might suffer a serious depreciation of pension-fund stockholdings.

So, taxing capital will hurt the very middle-class workers and incomes Obama claims he wants to help. His so-called middle-class economics doesn't work.

Close loopholes, but slash taxes

A related point: Obama's SOTU made no mention of cutting corporate tax rates. Instead the president trashed the top 1 percent and slammed companies for keeping profits abroad and using unfair loopholes and deductions.

He's right about loopholes and deductions. Let's close them. But while we're at it, let's slash the corporate tax rate and make America more competitive worldwide. Obama kinda forgot the lower-tax-rate part, didn't he?

Also, nearly all studies show that middle-income wage earners are the biggest beneficiaries of corporate tax cuts.

Regarding those evil 1 percenters, according to the Tax Policy Center, the top 1 percent of Americans paid 33.4 percent of their expanded cash income in federal taxes in 2014. Meanwhile, Americans in the middle 20 percent paid only 13.7 percent of their income in federal taxes, while the poorest paid 3.1 percent.

You'd think a good class warrior like Obama would like these numbers. Apparently not, but why?

Read MoreHot topic for the 1 percent at Davos: Inequality

Quite simply, he wants more money for government spending. A partial list includes more spending on child care, sick leave, equal pay, lower mortgage premiums, a higher minimum wage, student-debt forgiveness, tax credits, and free community college. Some say this could wind up costing $500 billion.

So there's a lesson here for congressional Republicans and some of my fellow conservatives: Do not get sucked into this class-war politics. You will never outbid the Democrats on middle-class benefits. And take a cue from Ronald Reagan, who rejected class politics and argued that his policies would increase prosperity for all Americans.

For instance, Obama's child tax credits would be available for couples up to $210,000, tripling the max tax credit for childcare by up to $3,000. And that's very close to what some of my conservative friends want. But there's a better way.

Get rid of the 10 percent bracket and collapse the 25 and 28 percent brackets down to 15 percent. So if you're making $100,000 a year and paying $25,000 at the 25 percent bracket, your tax cost drops to $15,000 at the 15 percent bracket—that's a $10,000 savings. If you have two kids, with a $3,500 tax credit per kid, that's only a $7,000 savings.

From the lower marginal tax rates, the middle class gets a much bigger tax savings. With marginal rates coming down, the incentive effect kicks in as people keep more of what they earn. This way, all middle-class folks are included: married with kids, single women without kids, millennials without kids, etc.

There's still big savings for the kids we love and cherish. But it's done without class divisions, or the targeted tax credits that Democrats love. (My only exception would be an expanded earned-income tax credit, which would have a longer phase-out period so as not to penalize folks moving from welfare to work.)

Former CEA chair Glenn Hubbard has argued that "free community college, an enhanced tax credit for child care and higher taxes on high-income earners and large financial institutions" will not generate "growth, work, and opportunity."

Good advice, Republicans.

Commentary by Larry Kudlow, a senior contributor at CNBC and economics editor of the National Review. Follow him on Twitter @Larry_Kudlow.