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The stories that matter about money and politics in the race for the White House
The writer is a contributing editor to the FT and CEO of American Compass.
If there is an indelible image of the ossified orthodoxy that came to control the Republican Party in recent decades, it is probably The scene on a debate stage in Iowa. in August 2011. All eight presidential candidates raised their hands to indicate they would abandon a deal that cut $10 in spending for every dollar in tax increases. Where had such an absurd position originated? Not with Ronald Reagan, who raised taxes repeatedly when his initial tax cut widened the deficit more than expected.
Rather, a confluence of easily disproven theories had come together, forming a mighty river of fanaticism that culminated in UN Ambassador Nikki Haley’s infamous statement in response to the Covid-19 pandemic sweeping the United States, that “Tax cuts are always a good idea.”. Those theories are finally fading as conservatives reevaluate their blind faith in free markets and their hostility toward government. As a result, tax and budget debates are changing.
The most important of these theories was that tax cuts were the key to economic growth. In some cases, they can stimulate growth. But “it is by no means obvious. . . that tax rate cuts will ultimately lead to a larger economy,” as William Gale of the Brookings Institution and Andrew Samwick of Dartmouth College argue. have observed. “Historical evidence and simulation analyzes suggest that debt-financed tax cuts over an extended period will have little positive impact on long-term growth and could reduce growth.” Samwick was chief economist on George W. Bush’s Council of Economic Advisers.
Growth theory was tested most recently with the Tax Cuts and Jobs Act of 2017, which at first glance seemed to work. In early 2019, Kevin Hassett, President of Donald Trump’s CEA, presented preliminary data showing that growth and the contribution of business investment to it were increasing in response to the tax cuts precisely as expected. However, somewhat embarrassingly, when that data was reviewed, the final numbers for the metrics chosen by the White House itself showed that the tax cuts had had no effect.
The second theory was that the tax cuts pay for themselves. This has not been true of every large US fiscal package on record. Hypothetically, tax rates could be so high that lowering them would increase revenue. But with rates already halved since the 1970s, that’s not the situation today. Sufficient growth could generate additional revenue, but only if tax cuts generate growth. Even the conservative Tax Foundation ranks it among its “10 common tax myths.”
The third idea was that the Conservatives should “starve the beast” of government. It is thought that politicians will always spend as much tax revenue as they have, and also run up as many deficits as they can. So any tax revenue raised to close a deficit would simply disappear again as more spending. Conversely, if the government is denied revenue, it will have no choice but to cut spending in response.
This notion managed, surprisingly, to be triply wrong. He failed as a theory: Promising to cut taxes in the face of high spending only makes high spending seem cheaper to voters, as Reagan’s chief economist, William Niskanen, had explained. He failed in practice: After decades of fiscal discipline, Republican promises to only cut taxes unleashed unprecedented deficits and debt. And it failed as a policy: Despite Tea Party rhetoric, most conservative voters support high levels of social spending and wait for a reduction in the deficit both tax increases and spending cuts.
Faced with these realities, conservatives are beginning to change course. In January, Chip Roy, policy chair of the House Freedom Caucus, he lamented the influence of special interest groups, “who say you can’t even talk about taxes.” in a recent interview on the American Compass PodcastHouse Budget Committee Chairman Jodey Arrington also rejected anti-tax “purity pledges” and backed the idea of budget negotiations that would raise revenues and cut spending. Tom Cole, chairman of the House Appropriations Committee, has voiced a similar sentiment, while Jason Smith, chairman of the House Ways and Means Committee, has saying that some Republicans are discussing an increase in the corporate tax rate.
With a nearly $2 trillion budget deficit driving economy-wide imbalances and interest payments on debt now exceeding defense spending, we may finally be seeing the return of fiscal conservatives. Even if Republicans sweep the November elections, the direction for betting on taxes may not be low.