10 questions for Jeb Bush

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Former Florida Gov. Jeb Bush, 62, remains the financial heavyweight of the Republican presidential field, with more than $100 million raised for his Super-PAC and $11 million for his campaign as of midyear. But he is no longer the consensus front-runner, having fallen behind Donald Trump and Ben Carson nationally, and others in the early states of Iowa and New Hampshire.

He still benefits from significant institutional support from Republican officeholders, business leaders and policy advisers. He aimed to deepen those advantages with the recent release of his tax-cut plan, which went beyond anything his brother George W. Bush proposed.

In the name of every American's "right to rise," he called for reducing the top personal income tax rate to 28 percent; slashing the top rate on corporate profits and capital gains to 20 percent; and eliminating the estate tax. As Democrats accused him of seeking to reward the wealthy, he pointed to middle-class benefits in his plan that would eliminate federal tax liability for families of four making $40,000 or less. To complaints that he would balloon the deficit, he cited a "dynamic" boost to economic activity that could help achieve his goal of 4 percent annual growth.

Bush sat down with me to discuss his campaign at the Parlor City Pub in Cedar Rapids, Iowa. What follows is a condensed, edited transcript of our conversation.

HARWOOD: Let's talk about economics. Start by stipulating that presidents don't control everything in the economy; a lot of factors involved. But I wonder how you process the recent evidence. We had 12 years of Reagan and your dad, eight years of Clinton, eight years of your brother, and now seven years of Obama. What should a reasonable person conclude from the fact that the Democrats in those 15 years saw more jobs created than the Republicans in 20?

BUSH: First of all, I think you have to factor in that policies have long-term impacts. So the tax reform of the 1980s created an environment that President Clinton took advantage of. The PAYGO budget compromise, where there was an increase in taxes, but there was, more importantly, a rule that every dollar of additional spending required a cut in spending, was very effective in restraining government during the Clinton era, as well.

Presidents and Congress have an impact particularly on tax policy to shape economic growth or the lack of it. The results can occur for a short period of time or a long period of time. The tech bubble created enormous economic activity. You think about all the capital gains revenue that came when people were selling stocks, and so then the crash created the opposite effect.

Jeb Bush talks to CNBC's John Harwood at the Parlor City Pub and Eatery in Cedar Rapids, Iowa.
Mary Stevens | CNBC

HARWOOD: What should a reasonable person conclude from the fact that in each case of Republican governance, deficit was higher when they left than when they came in, and in the Democratic case, the deficit was lower as they were leaving than when they came in.

BUSH: If you assume that we're a dictatorship and the president just has a budget and looks at himself in the mirror and says, "The budget's passed, and now we can move on," that would be fine. Except that you had a Democratic Congress in the case of my dad. You had a Republican Congress in the last years of President Clinton's time. And my brother—it was mostly Republican control, and I have faulted the Congress and my brother for not maintaining control over spending. My brother didn't veto any appropriations bills.

Programs need to be paid for. If you're going to expand another entitlement, like Obamacare or part D of Medicare, there should be some consistent plan to pay for them because we do have a structural deficit, and it's serious. It's easy to kind of slough this off. This is a really dangerous kind of deal. We've been medicated by 0 percent interest rates. If rates ever do go up, and they could easily—or when they do, because eventually I think they have to—you could see debt service costs explode. Focusing on the here and now is the natural tendency in Washington these days, and I think that has to stop.

HARWOOD: What should a reasonable person conclude from the fact that the only president who oversaw 4 percent growth in every year of the term in the last generation was Bill Clinton in the second half of the 1990s—after he had raised taxes, which many Republicans said was going to tank the economy?

BUSH: There were lots of momentum trends that had already happened. You cannot tell me that higher taxes yields greater economic opportunity. Bill Clinton didn't reject the new normal. He signed trade agreements to expand trading opportunities. He was not hostile to capitalism.

HARWOOD: You really think Obama's hostile to capitalism? Trans-Pacific Partnership—he's moving forward. South Korea, Colombia, he finished those agreements that your brother had moved down the line.

BUSH: I definitely do. I think he has a deep-seated belief that through government programs and through government regulation, you can improve the social condition. I think that's his default place. This is late in the game for him to show commitment to free trading, whereas Bill Clinton did from the beginning. He shuffled the papers around and signed them. I don't think he is as hostile on trade as he is on capitalism in general. Believing that unleashing American entrepreneurial spirit, you know, through lower taxes and less regulation; that's not his instinctive position, for sure.

There's a good case to be made that people's labor income should be treated the same as capital investors. I get that. But if you're looking at the maximum growth effect, which is really the purpose of our tax proposal, I think most people, at least conservative economists, would suggest that lowering the capital gains rate is the way to go.
Jeb Bush

HARWOOD: You mentioned the Reagan tax reform. He went to the 28 percent rate that you've proposed. But he left corporate taxes higher at 34 percent and he eliminated the differential between ordinary income and capital gains and dividends. Why do you take such a different path from Reagan?

BUSH: The difference is that corporate rates in Europe, which was our major competitor back then, and I think even in Asia, were significantly higher than they are today. In the '90s, and the first decade of the new millennium, most countries have lowered their rates and simplified their code. We now are in a position where our 35 percent rate is the highest in the industrialized world. People can make the case, 'Well, some businesses have effective tax rates that are low,' but it distorts investing—out here, you know, in Cedar Rapids. There's a lot of financial game playing going on.

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HARWOOD: Do you regard your brother's economic tenure—which pursued a broadly similar strategy to what you're proposing—as a proof point that this strategy works?

BUSH: Well, look, he was impacted by some big secular events. The tech bubble, 9/11—those had huge impacts. There was growth. And there was some job growth.

Wage growth has been flat for a long time in our country. We have this big challenge that we have to fix. And that's part of the mission I'm on—growth by itself isn't going to create higher wages. But higher growth will generate more wage growth than no growth. And if you do it in the right way, where you're putting money in people's pockets, you can create economic activity.

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HARWOOD: You can't prove these things one way or the other. But if you assume there's uncertainty about it, given the trend toward income inequality, which you've been concerned about, and the concerns within your party about debt and deficits, why would you take the risk at this stage of a policy that confers a huge proportion of its gains in the immediate sense on people at the top of the income scale and, if it doesn't have the growth effects you're talking about, would substantially increase the deficit?

BUSH: First of all, the corporate reform benefits everybody, all workers, because if you lower corporate rates, you're going to see an explosion of investment in their own country. It'll be new plant equipment, efficient plant equipment, more productive plant equipment that'll allow for higher wages. We need to get to the 21st century industrial base. And I think a lower corporate tax rate will help get us there.

On personal rates, in our plan the people at the highest level, 1 percent, 10 percent, 20 percent, the people in the top 20 percent, pay proportionately more under our plan. They do receive a benefit, and that'll help the economy.

But the broad tax policy that we're proposing does the opposite of what you're suggesting, which is it provides tax relief for the middle class, and it provides some narrow-targeted tax relief for people like a spouse that wants to go back into the workforce. I think the marriage penalty is a really bad idea. People at the age of 67 still putting money into the Social Security system, they're working because they have to. We're suggesting that we give them a tax cut. Their payroll tax would be eliminated, a 6 percent tax, so that they could keep it in their pockets. And there's lots of good estimations about how much jobs will be created there.

Everybody freaks out about the deficit. And I worry about the structural deficit for sure. But if we grow our economy at a faster rate, the dynamic nature of tax policy will kick in. And so we'll be in the hole around $1.2 trillion over 10 years. And these are moderate growth effects. I'm not using the ones that I believe. I'm more optimistic.

There's never been a time where there hasn't been a dynamic effect of taxation. That's not a risk at all. That's just a simple fact. Take the contrary argument here for a second: If tax policy doesn't matter, why don't we just tax everything?

HARWOOD: How does eliminating the estate tax helps anybody's right to rise? That tax only applies to people who have made it big time—they've risen.

BUSH: Well, they're dead. If they've lived a good life, outside the money they've made, they're up in heaven looking down on us.

What we've suggested is that a family asset doesn't get taken away. When someone does sell the asset—the next generation—they're paying on the full amount of the appreciation. That's the compromise position. And that allows for second-generation businesses to continue to flourish. People have earned this through good fortune and a lot of hard work and taking risks. I don't think you should take that away from families.

I don't know. I don't think we should try to treat the pope as an economist. He's a religious leader. I've read the encyclical. It talks about the rights of the unborn. It talks about traditional marriage. It talks about a lot of things that don't get much air time in the secular world.
Jeb Bush

HARWOOD: The pope has had very strong criticism of some aspects of capitalism, also of inaction on climate. As a person of faith who converted to Catholicism, how do his words affect how you think? Rush Limbaugh said his views on economics were pure Marxism.

BUSH: I don't know. I don't think we should try to treat the pope as an economist. He's a religious leader.

I've read the encyclical. It talks about the rights of the unborn. It talks about traditional marriage. It talks about a lot of things that don't get much air time in the secular world.

HARWOOD: Our politics, more than at any time in your lifetime and mine, is polarized by race right now. Because of demographic changes, that's to the detriment of your party at this point. This campaign has not helped the Republican cause. I wonder what you as a leader of the Republican Party would say to the significant group of older, blue-collar whites in your party who are fearful, angry about the way the country has changed. What do you do to reassure them, make them less fearful, and in some cases, rebut what is plain racism?

BUSH: We've got to get beyond the dangerous rhetoric that exists of division. The president has a responsibility and a candidate for president has a responsibility to use their words in a way that is more uniting and more unifying. And frankly, look, I want to win.

I don't think you have to abandon your conservative principles. You give people a sense that we can enforce the rule of law, the system can work for them, that we need to restore a level of civility and decency in our politics today, and have provocative ideas for everybody to be successful.

I don't think people are inherently racist in this country. In fact, I think that we have a pretty noble tradition of the opposite. But people are deeply disaffected right now. So rather than prey on their angst and fears, I'm taking a risk of trying to appeal to their hopes and dreams. Give them a sense that leadership matters, and that if we fix these things, things are going to get a lot better in this country.