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Why Tax Cuts Are No Longer Popular (And What to Do About It)
In Bloomberg, Megan McArdle recently argued that tax cuts are no longer good politics for Republicans. She asserts that pro-growth politicians have incrementally painted themselves into a corner on this over the last three decades. In order to sell each particular tax cut to the middle class, conservative legislators sweetened each pot by cutting middle-class tax rates more than the tax rates of the rich. Because this has been done for each tax cut iteration, the overall effect has been to make the tax code even more progressive. In the end, the tax cutters had undercut their own message by solving the tax problems of the middle class. As a result, the issue no longer resonates today with them.
To counter McArdle, I suspect pro-growth economists will argue that tax cuts are, nevertheless, still effective at stimulating economic growth, which brings prosperity to all. For this reason, tax cuts are still in the long-term interest of the middle class even if they only directly affect the rich. They can point out that the tax rates of the rich have a much bigger impact on the economy than the tax rates for everybody else. This is because a larger percentage of their income is directed towards productive investment. The more it’s taxed away, the less it’s available for capital investment.
In contrast, poor people invest very little. If they are taxed more, they will definitely feel the pain more acutely, but — because they have no choice but to carry on as best they can — the overall effect of their tax burden would be small. Perversely, this means that the economic benefits of tax cuts have increased because the US tax code has become less hated.
So who is right, McArdle or the Club for Growth economists?
I argue that both are. This is because McArdle is talking about political policy, while the economists are discussing public policy. One is about winning elections; the other is about the economy. Unfortunately, there is no law of nature that requires good policies to also be good politically. Beneficial economic policies can repel voters as much as attract them.
The challenge for the conservative political strategist is to devise a way of winning elections while at the same time enacting good policy. I don’t think that this is an insoluble problem. In fact, I don’t think it is even a particularly difficult problem. The first step is to recognize the distinction.
McArdle posits a good suggestion on how to square the circle:
Republicans may well be able to have tax cuts as an add-on to other things that actually promise benefits to that vast middle swathe of voters. But it can’t be the entrée, much less the whole meal.
I think this is right. You must package tax cuts with a larger package of policies that are both consistent with free-market principles and widely popular at the same time. These are not hard to find. One would be a crackdown on crony capitalism, the system whereby businessmen connected to the government game the system. This is a good way of demonstrating that you are pro-free market rather than pro-business. (Of course, K-Street lobbyists won’t like this but hey; ask John Boehner what K-Street did for him lately.) Another would be to emphasize the importance of work and savings on economic success. The Protestant work ethic has long been appreciated in our culture and its champions are always welcome. Of course, going after the freeloaders on welfare is also both good politics and policy (particularly if you make sure to emphasize how similar they are morally to the Wall Street freeloaders). And this is just what I came up with on the spur of the moment. There is much more.
As an aside, one of the few mistakes in McArdle’s article is to lump deregulation in with tax cuts. The politics of overregulation are completely different. While it has been true that the deregulation issue has been very poorly sold by the Stupid Party, I don’t see any reason why this needs to continue. I think there are plenty of ways to sell deregulation. For instance, how about: deregulation = freedom. But that is a topic for another post.
Published in Domestic Policy, Economics
Nice post. Taxes have not been much discussed this election cycle on the Republican side, in part because of the lack of new ideas, but mainly because no one believes the candidates. The Republican electorate is like Charlie Brown finally refusing to try to kick the football.
As an aside, one of the few mistakes in McArdle’s article is to lump deregulation in with tax cuts. The politics of overregulation are completely different. While it has been true that the deregulation issue has been very poorly sold by the Stupid Party, I don’t see any reason why this needs to continue. I think there are plenty of ways to sell deregulation. For instance, how about: deregulation = freedom. But that is a topic for another post.
Maybe another post, but it’s the right argument to have. Regulations are not only choking off our economy, but are deeply corrosive to our Republic. Unelected and unaccountable bureaucrats, protected by civil service laws regs, force everyone to jump through hoops to do anything worthwhile. Licensing requirements do the same thing; they are less about safety and more about crony capitalism for vested interests.
Taxes do matter, though. We just need to do a better job of persuasion, and we need to connect them to people’s lives, not just great spreadsheets.
The GOP should drop tax cuts for individual income taxes as an issue.
Americans like the progressive tax structure; flat tax advocates get no traction.
They should pursue something useful that could be accomplished. Cut the corporate income tax. Bring it down to 25 %, which would put it in accord with the rest of the western world. That could be sold as a measure to fight off-shoring of dollars and jobs.
Megan is right. The Bush tax cuts were an unnecessary disaster. There were two impacts on the economy, 9/11 which would vanish rapidly and a necessary adjustment to dot com over investment. The dot com adjustment was typical to new technology, over investment not mal investment. The people who lost their start ups and investment and others their jobs were all quickly absorbed into the winning ventures or started new ones. No stimulus was needed. In order to address the predictable, ‘tax cuts for the rich’ charge, Bush cut lower rates so much that he gutted the tax code. How did that work out as PR? Now undoing that disaster will be difficult but it must be done. In this sense, the tax code and regulatory reform are similar. Both are dense rotten alluvial deposits of many decades of special interest accretions. It is so opaque extensive and dense that it is impossible to reform. Any attempt at reform will lead to a giant barter with all interests snarling in a corner to defend and hence trade their little piece of the code. It must be tossed and begun from scratch. The same can be said of the regulatory regime but undoing regulation is difficult and also full of unintended consequences. The politics of it are to sell the idea of eliminating all deals, all loop holes, all advantages for the rich. Make it so simple that folks can understand and also understand when it’s corrupted.
The tax cut argument is won. Deregulation will help, but only if the federal budget reverses all of its size gains of this century.
I would almost accept every regulation if we applied the productivity gains of the private sector to the public sector. That means automation and vast cost cutting in public services. A lot of people’s government jobs have to go away to do any good at all.
You see why there is no enthusiasm for real reforms.
The problem right now is that there is no shortage of capital available for investment. The Fed has printed so much money that we are awash in the stuff, or we would be if it weren’t all sitting in bank vaults. The fact that most businesses aren’t borrowing (or perhaps it’s that banks aren’t lending) has had an upside. It has prevented the surge in inflation that the Fed’s loose money policy should have caused. But it has also mooted appeals to the need for freeing up capital for investment.
If we want to protect capital, the best way is to reduce the tax on capital gains. While this wouldn’t exactly increase the amount of capital invested, it would free that capital to move into more productive uses. And, happily, it also increases tax revenues in the short run.
Unfortunately, cutting marginal income tax rates has proven to be counter-productive. As CC points out, each such cut has made the tax code more progressive. But more importantly, each such cut is followed by a tax increase, but only at the top. Which adds even more progressivity.
Pursuing “progressive” taxation has been a disaster for the GOP, as they’ve validated the Progressive movement. Voters correctly see two Progressive parties: one that means it, and one that’s half-hearted. People don’t like voting for second-best.
If nothing else, they were based on Keynesian logic: temporary and targeted.
I’d go after the cronyist angle on overregulation. The administrative states protects and profits the already-connected, and it oppresses those who just want to live their lives.
Simply lowering the corporate tax rate to 25% wouldn’t matter that much. They need to lower it and move to a territorial tax system rather than the ungodly complicated global tax system we have today.
I’ll also add that this might have something to do with it, at least for the voters who are aware of it:
Yes, that’s the other part of the problem, poorly designed for what they were supposed to address and based on flawed economic logic. But then I think all Keynesian logic is nonsense.
Even just shifting to a territorial tax system would create tremendous gains in GDP as multinationals bring back profits back to the US and remove incentives to move offshore.
I think a move not to cut taxes, but to reform and simplify is the right approach for Republicans. A president Trump would probably sign that.
The government cannot be reformed the way markets reform private activity. It is it’s nature to be dysfunctional. There is no self correction mechanisms, indeed every serious mistake creates new interests. Most of what it tries to do can’t be done. We have accepted the progressive notion that we can fix what we don’t like about capitalism through the administrative state. We can’t. Capitalism fixes itself unless big interests capture its piece of the state. Regulation is what gets captured.
Can someone go dust off a copy of the 1986 tax reform bill and submit it in the House?