Special Report

The Strategy of the Smart Surrender

David Frum still has a lot to learn from James Carville.

By 5.21.08

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I had a little argument with David Frum about taxes almost two years ago in a series of blog exchanges. He had argued that to pay for abolishing the Alternative Minimum Tax (AMT) we should adopt a carbon tax of equivalent size. The AMT had been adopted in the 1960s as a way of ensuring that a couple of dozen millionaires exploiting loopholes so furiously that they avoided any income tax liability altogether would be forced to pay some reasonable amount of tax.

But the AMT had never been indexed for inflation. So now, 40 years later, the AMT threatens millions of Americans with a punitive tax that would raise close to a trillion dollars over 10 years. It threatens in particular those in higher tax, Democrat states, as the deductions for state and local taxes are disallowed under the AMT. So Congressional Democrats are anxious to do something about the AMT.

I argued that if we had to adopt another tax to offset the revenue loss from eliminating the AMT, then we weren't really eliminating the AMT. We were validating a trillion dollar tax increase that was sold to America as a minor loophole closure only for the very rich, not a general tax increase.

Frum said my position was unrealistic and a smarter position for conservatives was to negotiate for the least bad tax increase to offset AMT abolition, a carbon tax that would tax only consumption and pollution, not savings and capital. He added that in opposing this I misunderstood the message of the 2006 elections (which was apparently that voters wanted a trillion dollar tax increase).

I call this the "strategy of the smart surrender," a theme I see emerging among some conservative writers. This is the argument that we are going to lose anyway, so we may as well go along with it and get the best deal we can.

By the end of last year, however, it was the Democrats who caved on an offsetting tax increase for the AMT. The Democrat leadership decided it didn't want to be tagged with promoting a major tax increase for the offset (apparently also misreading the results of the 2006 elections and failing to read Frum's blog).

The Democrats waived their own paygo rule to pass a "patch" that prevented the AMT from advancing to tax more and more middle class voters, resulting in another, $65 billion tax cut under President Bush. Democrat leaders said they would just deal with the AMT by continuing to pass such patches every year.

So it turned out that Frum's smart surrender wasn't really necessary after all.

IN HIS BOOK Comeback: Conservatism That Can Win Again, Frum elaborates further. He says that the taxpayer movement is dead because of the new realities of the Federal income tax.

The bottom 40 percent of all taxpayers in terms of income now pay 0 percent of all income taxes. In fact, they receive net payments from the Federal income tax equal to 3.8 percent of total income tax revenues.

The middle 20 percent in income pay just 4.7 percent of all taxes. Therefore, 60 percent of all voters appear to have little or no interest in further Federal income tax cuts.

The top 1 percent of taxpayers now pay 37 percent of all income taxes, while earning 16.3 percent of income. The top 10 percent pay 71 percent of all income taxes. Not much of a political base for a taxpayer movement, Frum argues.

This is the result of Republican tax policy going all the way back to Ronald Reagan and his advocacy of the Earned Income Tax Credit in the 1970s. Republicans have not only cut but have basically eliminated income taxes on low, moderate and middle income people. So when Hillary Clinton and Barack Obama rail against Republican tax cuts for the rich at the expense of the middle class, they are trying to play the voters for fools. Contrary to their rhetoric, looks like the rich are already paying more than their fair share.

Frum could be using his considerable communications skills to broadcast these basic facts to the general public, bolstering conservative and free market tax policy. But, no, he uses those skills to deride the efforts of anti-tax conservatives as politically defunct.

Frum writes, "The problem is that our slogan 'Read My Lips: No New Taxes,' has translated into practical politics as 'Read My Lips: No New Thinking.'" Frum adds that conservatives cannot succeed by "endlessly reprising (or attempting to reprise) our Greatest Hits of the Reagan Era."

It's not just the AMT where Frum wants to cave. He wants to take the same "smart surrender" strategy on the Bush tax cuts as well. He wants to extend his carbon tax to make up for the revenues lost by making the Bush tax cuts permanent.

But, of course, this would not make the Bush tax cuts permanent. It would effectively eliminate any net tax cut, and restore taxes to the levels before the Bush tax cuts.

Frum goes on to tell us that America's tax cutting days are behind her. He writes, "We will not soon again be able to offer America a big, broad, middle class tax cut."

That is because of America's looming entitlements crisis. Federal spending as a percent of GDP has been fairly stable for over 50 years now, since the early 1950s, at around 20 percent. But without fundamental reforms, that will soon change.

Primarily due to the big three entitlement programs, Social Security, Medicare, and Medicaid, Federal spending will soar over the next 35 years, to close to 40 percent of GDP. Frum writes, "In the face of such a huge fiscal gap, the days of broad, across the board, middle class tax cutting are over."

Indeed, Frum believes a tax increase will be inevitable to address this enormous long-term problem as well. Conservatives need to get in the game and lead the country to the least bad alternative tax increase. Thus we have Generation Y of the tax collectors for the welfare state, a true Son of a Dole.

FRUM MAKES TWO fundamental errors in this analysis. First, he fails to appreciate the overarching issue of economic growth in American politics. In other words, he is still behind the Carville curve ("It's the economy, stupid").

When Jack Kemp and Robert Bartley, the late director of the Wall Street Journal editorial page, convinced Ronald Reagan to run with the economic growth and prosperity through tax cuts theme was when Republicans were transformed from public support in the low 40s into a governing majority. Jack Kemp's central role in the political revolution we have experienced in the last 30 years is not sufficiently appreciated by conservatives today.

So even voters who pay little or nothing in Federal income taxes are primarily motivated by economic growth and personal prosperity. A message of tax cuts promoting economic growth will beat a message of tax increases promoting government spending every time.

McCain's tax policy of restoring the international competitiveness of America's corporations and employers will devour Barack Obams's promotion of the exact same tax policies and protectionism that produced the Great Depression. These messages, of course, must be well articulated to succeed.

Because of the economic growth message, and messages of simplicity and fairness, extensive polling shows that voters strongly support the idea of an option to choose a 17 percent flat tax. They also support capital gains and dividends tax cuts, and abolition of the death tax, for the same reasons. A Congressional supermajority requirement for tax increases is also popular.

Frum's second fundamental error is that Federal income taxes are not the only taxes voters pay. Replacing part of the payroll tax with personal accounts for Social Security polls extremely well. The long run vision should be to replace the entire payroll tax with personal accounts financing all of the benefits the tax does now. That is exciting and inspiring.

The housing crisis is causing local revolts against property taxes across the country. Nine states have no state income tax at all, including the large states of Florida and Texas. The other 41 states can phase out their state income taxes as well, replacing them with a combination of slightly increased sales taxes and restraints on state spending. This would tap into the grassroots popularity of a national sales tax.

This is quite a robust taxpayer agenda. This is no time for strategic surrender.

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.