High time for Republicans to renew their commitment to standing tough in opposition to tax hikes — here’s how to win politically in doing so.
It was one of the earliest defining moments of this presidential campaign. It left the White House accusing the early field of Republicans of being out of touch and, typical of Democrats’ now-tired rhetoric, beholden to “millionaires and billionaires” and the Tea Party. And it left the New York Times Editorial Board apoplectic — the first clue that the GOP candidates were on to something good.
The event was the Republican debate in Ames, Iowa, on August 11, 2011, when Fox News anchor Bret Baier asked the eight candidates which of them would “walk away from a ten-to-one (ratio of spending cuts to tax increases) deal.” All eight hands went up.
It was the fiscal policy equivalent of Nancy Reagan’s “Just Say No!” campaign against drug use, except that it is arguably an even more important goal, particularly for politicians.
As Democrats play Thelma and Louise politics with the coming “fiscal cliff,” hoping that Republicans will be so afraid of being blamed for not agreeing to a “balanced” solution, the GOP should call their bluff.
A congressman, whom I will not identify by name or party, e-mailed me the other day suggesting tax reform that closes loopholes, ends some subsidies and “tax expenditures,” and then “uses three quarters of the revenue to bring down tax rates and one quarter for deficit reduction.”
This siren song of “balance” is a seductive proposition for “conservative” legislators looking for a compromise or, more cynically, for liberal politicians looking to further increase the size and cost of government.
But if Mitt Romney was willing to walk away from a 10-to-1 deal — and I hope he remains true to his word — he and other GOP leaders should offer some steel for the spines of wobbly Republicans who are afraid of being accused of being “extreme,” of causing gridlock, of preventing “progress” and bipartisanship.
Republicans must remain mindful that bipartisanship always means conservatives moving toward a more liberal position, getting nothing in return other than avoiding the sometimes difficult but always beneficial task of explaining a principled vote to constituents. (Republicans could take a lesson from freshman Congressman Justin Amash, the second-youngest member of the House, who posts on his Facebook page an explanation for every vote he casts in the House. It is not just for this reason that I contributed to Amash’s campaign earlier this year.)
Several basic facts and principles are in order to give wavering Republicans the intellectual ammunition needed to hold their ground, and the confidence and ability to explain it well:
(1) As Milton Friedman explained (in a video that should be required viewing for every member of Congress), “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.” In other words, claims that any part of a tax increase will be used for “deficit reduction” are a deception.
(2) Democrats argue that federal income tax collections are too low as a share of GDP, and therefore tax rates should be raised on the “rich.” Indeed, 2010’s tax receipts, at about 15 percent of GDP, were the lowest since 1950. This is not, however, due to President Bush’s tax cuts, at least not in the way the left believes. In particular, it is not that the “rich” are not paying enough tax but rather than the Bush tax cuts added to the trend during the last several presidential administrations (along with their collaborators in Congress) of making the tax code ever more “progressive” and removing ever more citizens from any federal income tax liability at all.
When the recent recession hit, the income of top earners was — as it always is — hit very hard, with their share of national income dropping substantially. When the top one percent of earners pay roughly 40 percent, and the top ten percent of earners paying over 70 percent, of all income taxes, a drop in their income turns into a drop in tax receipts which is not buffered by the nearly half of the country which pays zero (or are net recipients of) federal income tax.
This explains the move away from the historical average of income tax collections of about 19 percent of GDP, as economist Kurt Hauser describes in what has become known as Hauser’s Law: no matter what income tax rates have been, government has rarely been able to extract more than about 19.5 percent of GDP from the citizenry.
Thus, as Hauser explained 18 months ago — in response to the same Democrat tax-hike proposal they are pushing today — “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues.”
As the Cato Institute’s Dan Mitchell points out, there is nothing magical about Hauser’s 19.5 percent number: European countries which have a Value Added Tax (essentially a national sales tax) and/or much higher tax rates on the middle class do extract more of their citizens’ earnings. But in the US, in the absence of both a VAT and the political will to raise taxes on the middle class, Hauser’s law remains an important idea to understand the impact (or lack of impact) of tax hikes on government revenue.
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H/T to National Review Online