The Tax and Spend Spectator

Supply-Side, the Next Generation

Tax cuts aren't enough.

By From the December 2010 - January 2011 issue

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Even before its report was released, Washington hearts were aflutter and tongues were a-wagging about the Obama deficit reduction commission. The bipartisan blue-ribbon bunch solemnly vowed they would propose $3 in spending cuts for every $1 in tax increases, a ratio reminiscent of past tax-hiking budget agreements. Whatever fat is trimmed from the budget, overall both taxes and spending usually end up rising.

Anything adopted in response to the Bowles-Simpson recommendations is likely to follow this familiar pattern. After all, who is the White House more inclined to listen to: Americans for Tax Reform, which is sounding the alarm against trillions of dollars of new revenue on the table, or the AARP, which is already on the warpath against unspecified and improbable spending cuts? To ask the question is to answer it.

But the Bowles-Simpson commission's 15 minutes of fame is as good a time as any to examine the Republican divide over deficits. On the one side there are green-eyeshade Republicans who care about the national debt and believe in balanced budgets. Unfortunately, their approach to dealing with deficits and Democrats is often similar to Charlie Brown's approach to Lucy and the football: these Republicans go along with tax increases in the mistaken belief that FDR's disciples will cooperatively take an axe to entitlement programs. End result: what Newt Gingrich called tax collectors for the welfare state.

Then there are the Republicans who are such wild-eyed supply-siders that they believe things about tax cuts that the original supply-side economists never claimed. In just the past few months, we have heard the top two Republicans in the Senate say that tax cuts necessarily increase revenues, just as John McCain did in an interview with a conservative magazine before clinching the GOP nomination. There is the (possibly apocryphal) Dick Cheney quote about how Reagan taught us "deficits don't matter" and Jack Kemp's well-documented assertions that spending cuts are a form of "root-canal politics."

Thus even within the Republican Party, the alternatives are usually tax-and-spend versus borrow-and-spend. (Concord Coalition types like to imagine that tax-and-don't-spend is a viable option, but this is implausible in a democracy for reasons that should be obvious to anyone who has ever taken Poli Sci 101.) Indiana governor Mitch Daniels, profiled by your humble servant in the November issue of TAS, may have already fallen into the tax trap: a serious and sober deficit hawk, he has engaged in fisticuffs with fiscal conservatives over a value-added tax.

Not for the first time, Daniels should look to Phil Gramm for an example of what not to do as a potential pro-austerity Republican presidential candidate. Although Gramm was an early supply-side champion, he was bamboozled into supporting the tax-hiking budget agreements of 1982 and 1990. Gramm claimed he reluctantly backed the latter because President George H.W. Bush, a fellow Texan, needed his vote. What both Bush and Gramm really needed were the votes of millions of conservatives, which they didn't get after going with illusory deficit-reduction tax increases.

To some extent, both camps are reacting to each other's excesses. The anti-tax Republicans know that if neither party is willing to tackle our oversized spending commitments, one party has to remain steadfast on taxes. Otherwise, the deficit will be dealt with almost entirely on the revenue side of the equation, an economically destructive prospect. The anti-deficit Republicans understand that real spending cuts are difficult to achieve. They are willing to pay the price-and expand the political coalition-necessary to enact them.

In reality, the supply-siders and the deficit hawks are both right. High marginal tax rates are injurious to economic growth. Chronic red ink puts the country on an unsustainable fiscal path. Tax cuts make a platform of limited government politically possible; spending cuts make it arithmetically possible. Finally, the time may be right for conservatives to campaign as government-cutters rather than just tax- or budget-cutters.

Pat Toomey led the emphatically anti-tax increase Club for Growth. But as the Republican nominee for Senate from Pennsylvania, he did not ignore the spending side of the ledger. Toomey opposed the big Obama spending programs, from the stimulus to the health care program, as well as bipartisan bailouts of private industry. He was also one of a handful of GOP candidates, like Rand Paul in Kentucky and Sharron Angle in Nevada, to touch the third rail of entitlements.

Most Republican candidates remained abysmal even this year, slinking away from Social Security reform and engaging in demagoguery about the Obamacare Medicare cuts. Nevertheless, the small group National Review editor Rich Lowry called the "honesty caucus" could grow as Republicans realize it is possible to be either a big-spending or low-tax party but not both.

An even more important development is that the Tea Party movement isn't just a tax revolt; it is anti-debt and anti-spending. The $700 billion Wall Street bailout and the $787 billion stimulus -- both of which the elites hysterically and implausibly say "worked" -- brought it into existence before there were any broad-based tax increases. Even if some Tea Partiers are more principled than others, real grassroots activism against federal largesse is an important hedge against Republican statism.

REP. PAUL RYAN, the Wisconsin Republican whose lonely "Roadmap" is the closest thing his party has to a blueprint for dealing with the entitlements crisis, has described himself as a "second-generation supply-sider." During the Reagan years, it was a bit more justifiable -- if still usually imprecise and often technically incorrect -- to say that tax cuts of the Kemp-Roth variety "paid for themselves."

Back then, there were 14 tax brackets. The top marginal income tax rate was a stupefying 70 percent in 1981. When George W. Bush took office 20 years later, it stood at 39.6 percent. After the Bush tax cuts, it was 35 percent. While the capital gains tax cuts of 2001 and 2003 paid off handsomely, to imagine that 35 percent is far out enough on the Laffer Curve to produce revenue reflow effects sufficient to pay our way out of the current mess is to engage in fantasy.

Under Reagan, we could briefly experience what David Frum billed as "post-Great Society government at pre-Great Society prices." And even then, the deficits and spending piled up on Reagan's watch -- however necessitated by the need for a late Cold War defense buildup and further inflated by Democratic intransigence -- nearly undid all the work he did on tax cuts. Even the core Kemp-Roth cuts began to erode as early as 1990, the first year in which the Bowles-Simpson commissions of their day began to monkey with deficit reduction.

The damage done during the Bush years is even harder to calculate, having set the stage for the Obama administration both politically and fiscally. The number-crunching young conservative reporter Stephen Spruiell compared the Bush-era spending increases to the subsequent Obama spending spree. "A $220 billion increase isn't nothing, and the damage it will do is likely to be compounded by the fact that it represents an addition to the baseline," he observed. "But it isn't a gargantuan blowout compared to where we would be if the Bush-Reid-Pelosi trends had continued." Especially since the wars could have been at least partially paid for by cutting domestic spending, as then budget director Mitch Daniels publicly recommended.

If Republicans are serious about charting a different fiscal path for this country, they will abjure both the tax-raising ways of Bush the Father and the borrow-and-spend of Bush the Son. It's time for a new generation of fiscal conservatism.

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About the Author

W. James Antle III, author of the new book Devouring Freedom: Can Big Government Ever Be Stopped?, is editor of the Daily Caller News Foundation and a senior editor of The American Spectator. You can follow him on Twitter @jimantle.