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Why are tax cuts an article of faith?
Today’s head-scratcher: Why, like the moth to the flame, are Republican candidates so drawn to supply-side tax cuts?

February 23rd, 2016 at 9:21 am

Let me paraphrase that title a bit: why are they so forthcoming about it in the midst of an anti-establishment election?
Read this useful NYT review of the depth of the R candidates tax-cut proposals.

Quote:The tax plans of the Republican presidential candidates would cut federal revenues as much as $12 trillion over a decade, a post-World War II record eclipsing the deep tax cuts of George W. Bush, Ronald Reagan and John F. Kennedy. And they would come just as America faces the costs of its aging baby-boom generation.

Tax expert Bill Gale provides an efficient summary of the problems with this:

Quote:“One, they are enormous tax cuts relative to anything we’ve done in the past. Two, the candidates don’t specify how they’re going to pay for these tax cuts. And three, they are hugely regressive” — that is, the higher a person’s income, the bigger the tax cuts that taxpayer would receive, both in dollars and as a percentage of income.
If the candidates “ever do get around to specifying how they’re going to pay for the tax cuts,” Mr. Gale added, the budget savings are “going to come from low- and middle-income households” because those Americans benefit more than the rich from the government’s domestic spending programs.

I’ve disparaged the economics of trickle down ad nauseam, most recently, yesterday:

Quote:[trickle-down theory is based on] increasing growth by cutting taxes on rich people based on the faith that they’ll create more economic activity (and create it here, not abroad). To put it mildly, that faith is misplaced. You know what happens when you cut taxes on the rich? They get richer.
[See here for more details and citations.]

But I’m not here today to talk economics or fiscal policy. I’m having a bit of trouble wrapping my head around the politics of all this. Consider these points:

A very similar trickle-down agenda worked badly for Romney/Ryan, allowing the opposition to portray their candidacy as out-of-touch plutocrats, unconcerned about middle-class income stagnation and inequality.

In this election, it seems particularly obvious that time-worn, establishment-conservative proposals like big tax cuts for the wealthy are out of tune with the Republican primary electorate. A non-trivial core of Republican primary voters appear to be (or worry about becoming) downwardly mobile middle-class people who might not react favorably to zeroing out taxes on investment income, as Marco Rubio proposes.

–Also, in this election, facts and coherent policy positions are not exactly what the conservative primary base appears to be clamoring for.

If I’m roughly right, why would a candidate feel compelled to lay out the type of proposals described in the NYT piece? Even if that’s where you ultimately want to go, why not, especially if you’re the current front-runner, just say, “I’ve got an awesome tax plan that’s gonna work great!”? When they ask you, “what is it?,” you just say “it’s got something for everyone!” which is not completely false as these plans tend to cut federal income taxes for everyone who pays them, though far more for those at the top. (Although, if they really did try to offset the lost revenue with spending cuts, that would likely be at the expense of the least well-off, as Gale suggests.)

And yet, Trump, who claims to want to tax the rich, delivers 35% of the benefits of his proposed cuts to the top 1% (an e.g. of that bit about facts not mattering so much). His plan also loses the most revenue among those that have been scored so far.

One argument I often hear is that “they do this to signal their rich donors that they get it; they understand the real deal and recognize the pay-to-play standard in today’s presidential politics.” Maybe, but I don’t really buy it. Unless their donors are all checked out, they must recognize that the candidate can’t help them if they can’t get elected. And Trump doesn’t need their money anyway.

Perhaps it’s all they’ve got. I’m more prone to believe this.  Jimmy Pethokoukis, who also ponders these questions from the other side of the aisle, reminds us of Robert Novak’s famous line: “God put the Republican Party on earth to cut taxes. If they don’t do that, they have no useful function.” Or, maybe it’s just a dog whistle for starving the Treasury of revenues and reducing the size of government, although that’s not how this sort of thing usually works out (instead, you end up with larger deficits; note that none of the candidates have actually articulated offsetting spending cuts).

But again, you can’t cut taxes if you can’t win. I’m not the political analyst here and you’re within your rights to point out that these trickle-down plans don’t seem to be hurting (or, for that matter, helping) any of the candidates in the primary.

It’s more like they’re just checking a box. And I guess that’s kind of puzzling to me in a year when I think the electorate is less interested in that sort of thing if not downright likely to be pissed off about it.
Jonathan Chait shows in The New York Times how fanatical the Republican opposition even to moderate tax increases really is, even if these just amounted to closing loopholes and getting savings in Medicare and Social security in return:

Quote:For more than 25 years, the centerpiece of Republican doctrine has been the necessity of reducing taxes for upper-income Americans and an absolute opposition to higher tax revenue in any form. During President Obama’s first term, anti-deficit activists came up with a plan that they hoped would induce Republicans to abandon their fanatical opposition to higher tax revenue. First, they would get Democrats to support cuts to Social Security and Medicare as part of the trade. And second, the higher revenue would come not in the form of tax-rate increases but instead by reducing loopholes and expenditures in the tax code. In theory, one could reduce enough deductions that the tax code could raise more revenue while still reducing tax rates.

In reality, Republicans refused to go for this deal. They didn’t just refuse once. They refused time after time. In 2010, the Simpson-Bowles commission came up with a plan that traded revenue-increasing tax reform for cuts to retirement programs, and leading Republicans like Paul Ryan all rejected the deal. Then, in 2011, Obama tried to strike a similar bargain with House Republicans when they held the debt ceiling hostage, but they rejected it again. That standoff led to the creation of a “supercommittee” that was tasked with creating another version of the revenue-increasing tax-reform-for-retirement-cuts deal, which predictably failed again. And then, when the Bush tax cuts were set to expire at the end of 2012, the Obama administration hoped the pressure of an imminent tax increase would force Republicans to make some version of the deal, but once again they refused, instead using their leverage to minimize the tax hit on upper-income households.

In 2014, Dave Camp, the retiring chairman of the Ways & Means Committee, proposed a tax reform that would not have raised revenue, but would have kept revenue at current levels — a dramatic departure from party orthodoxy. But fellow Republicans treated Camp like he was a leper and have basically acted since then like it never happened. Paul Ryan recently reaffirmed that he will only support tax reform that reduces the tax burden on the rich. All of this proves conclusively that the debt-hawk theory on how Republicans could be induced to give up their fanatical opposition to higher revenue failed.
Why ‘Fix the Debt’ Just Can’t Quit Paul Ryan

The curious thing is, the rich have done extremely well the last 35 years or so. What economic benefits will more tax cuts bring?
Here is Bruce Bartlett, the guy who actually designed the Reagan tax cuts:

Quote:It is G.O.P. dogma that the Reagan tax cut set off an economic boom. Every Republican presidential nominee since the 1980s has promised big tax cuts and another economic surge. Tax increases, Republicans believe, are the kiss of death for the economy.

But the Reagan tax cut played only a secondary role in the 1980s boom, which wasn’t really much of a boom. Real G.D.P. grew 37.9 percent in the 1970s, compared with 36.1 percent in the 1980s. The economy felt better because inflation came down extraordinarily quickly, far more quickly than economists in 1980 thought was possible. But this was primarily a result of the Federal Reserve’s tight money policy, not taxes.

The tax cut deserves credit for softening the blow from the reduction in inflation, which brought on a sharp recession in 1981-82. But what we think of as the Reagan boom was the typical rebound from a sharp recession, just as we had seen after all previous postwar recessions. Much credit for growth in the Reagan years must go to the sharp increase in government purchases for his defense buildup.

What many Republicans also forget is that Reagan cared about deficits and supported 11 different tax increases from 1982 to 1988 that collectively took back half of the 1981 tax cut. Although many conservative economists predicted doom from the 1982 tax increase, which equaled 1 percent of G.D.P., the beginning of the boom coincided with its enactment.

These economists also predicted catastrophe from the 1993 tax increase enacted under President Bill Clinton and from the expiration of many of President George W. Bush’s tax cuts in 2013. But in each case financial markets and the economy grew sharply afterward.

By contrast, the economy tanked during the Bush years despite numerous large tax cuts. The final proof that tax cuts are not the be-all and end-all of growth policy is the Tax Reform Act of 1986, which dropped the top income-tax rate to 28 percent. Conservative doctrine predicted an economic boom, but I don’t remember one, nor can I find one in the data.
Trump’s Misguided Embrace of Tax Cuts - The New York Times

Who is Bruce Bartlett?

Quote:I know something about the Reagan tax cut. In 1977, while working for Representative Jack Kemp, Republican of New York, I drafted the Kemp-Roth tax bill, which Reagan sent to Congress in early 1981. The law cut statutory tax rates by about 25 percent across the board.

Bruce Bartlett held senior policy roles in the Ronald Reagan and George H.W. Bush administrations. He is the author of “Reaganomics: Supply-Side Economics in Action.”
Trump’s Misguided Embrace of Tax Cuts - The New York Times

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