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.
(3) Democrats argue that the economy did very well after Bill
Clinton raised income tax rates, so how much harm could there be in
returning to those rates? Republicans are already calling their
bluff by saying, “OK, I’ll go along with it if you’ll go back to
Clinton-era levels of spending.” (It is a clever political retort,
but not actually good economic policy to take that deal.)
But calling the bluff misses an important point: While there are
many factors beyond tax rates that impact economic activity, the
Clinton presidency had two distinct
segments in terms of tax policy. First was the four years after
the 1993 tax hike; next is the four years after the 1997 capital
gains rate cut forced on Clinton by the Republican Congress.
(Then-Speaker of the House Newt Gingrich and his GOP colleagues
also kept spending under control and arm-twisted Clinton into
grudgingly signing the remarkably successful welfare reform
measures that President Obama now wants to gut.)
During the first four years of the Clinton administration, GDP
growth averaged 3.3 percent while real wages (salaries adjusted for
inflation) actually fell slightly. The first half of the Clinton
administration ended with the federal government still running a
$107 billion deficit. During the second half of the Clinton
presidency, when tax and other policy was strongly impacted by
Republicans, GDP growth averaged 4.4 percent, while real wages rose
at an annual rate of 1.7 percent. It was this second period,
following tax cuts, that the Clinton surplus appeared.
(4) From the “I know that you know that I know” files, Democrats
recognize that Republicans are afraid of violating the Taxpayer
Protection Pledge which
many of them have made to Grover Norquist’s Americans for Tax
Reform (ATR). So, Democrats are looking for ways to allow
Republicans to vote for Democrats’ tax hike (raising taxes on
individuals earning more than $200,000 or families earning more
than $250,000) without technically violating the pledge.
One current idea is to allow all the Bush tax cuts to expire
before bringing up “reform” for a vote, so that a vote to only
lower taxes on part of the population would nominally be a vote for
a tax cut. Norquist correctly says that this scheme “doesn’t pass
the laugh test.” No Republican should give a moment’s consideration
to the Democrats’ ploy which is cynical but not surprising, coming
from the party of “deem
and pass“ and other travesties of congressional
malfeasance.
Mr. Norquist, who is one of the most powerful players in
conservative politics, may be losing influence, even if only
slightly, among Republicans. Over recent months, a handful of
House
freshmen, former Florida Governor Jeb
Bush, his father, former President
George H.W.Bush (“Who the hell is Grover Norquist, anyway?”),
and most recently Senator
Tom Coburn (R-OK) have rejected the Pledge as unnecessary and
doing little other than giving Democrats political ammunition.
Norquist takes none of this
lying down, including saying that a recent
op-ed by Coburn “is filled with ‘lies’” and that if Sen. Coburn
wants to raise taxes, “he stands alone.” As far as “Bush 41” is
concerned, conservatives might find criticism from a man who is
perhaps best known for breaking his own “Read my lips: No new
taxes“ pledge to be a badge of honor for Grover.
While it may be unnecessary for some politicians, the Pledge is
an important influence on members of Congress who might otherwise
cave in to their baser political instincts. The country is better
for the Pledge, and while some flexibility for members of Congress
is a good thing, too much isn’t. As my mother likes to say, “I
promise to keep an open mind, but no so open that my brain falls
out.” What remains to be seen is whether Republicans who claim that
they remain faithful to the Pledge end up in a disagreement with
Mr. Norquist about what represents a tax increase.
In particular — and this is the answer I gave to the
congressman who e-mailed me with the unacceptable suggestion for a
“balanced” approach — Republicans, including Mr. Norquist, should
go along with almost any tax reform that closes loopholes and ends
deductions and subsidies while lowering rates across the board
if that tax reform is revenue neutral under a CBO static
model. And they should not go along with any tax reform that
is not revenue neutral, or which raises marginal tax rates on
anyone other than people who currently pay zero federal income
tax.
Static modeling, i.e. predictions of the impact of government
policy on government cash flows, is always biased against tax cuts
because it assumes that people’s behavior does not change in
response to the policy changes. History shows that static modeling
routinely underestimates the benefits to economic and job growth,
and therefore to tax receipts, of tax cuts and other pro-growth
economic policies. Therefore, any reform that includes tax rate
cuts but statically scores as revenue neutral will, all else being
equal, actually increase the amount of income received by the
government.
Calls for political “cooperation,” “bipartisanship,” “balance,”
or other weasel words designed to let Democrats grow government and
let RINO Republicans evade politically difficult votes on spending
reductions and entitlement reform must be rebuffed. While John
Boehner cannot put wax in the Republicans’ ears to block the siren
song of “can’t we all just get along,” some form of Ulysses Pact, even
if not the ATR Pledge, is in order.
When Republicans consider any tax reform deal that includes
raising tax rates on anybody who already pays federal
income taxes or closing tax loopholes without reducing rates,
they should think of Nancy Reagan and Just Say No.
