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Scholarly Response: “Tax Increases Essential to Fiscal Balance”

On Sunday, August 19, the Miller Center partnered with ABC’s “This Week with George Stephanopoulos” on the third of six special episodes examining some of the key issues heading into the 2012 Election.  On Sunday, six distinguished panelists discussed and debated whether or not the U.S. is headed towards bankruptcy.  Today’s guest post is from historian and former Miller Center Fellow Molly Michelmore offering her assessment of the arguments presented in the debate.

The exchanges during the Miller Center’s debate “Is America Headed Toward Bankruptcy” proved one thing: the supply-side faith is still alive and well in the United States.

Supply-side economics – which always had more to do with politics than economics – has been around since the mid-seventies.  History and experience have since disproved its basic premise; there is no evidence to suggest that the U.S. can bring its books into balance or achieve healthy economic growth by further slashing tax rates on the very richest Americans. 

Despite evidence to the contrary, however, faith in the power of top bracket tax cuts to spur economic growth persists.  And Grover Norquist and his organization, Americans for Tax Reform, should take much of the credit – or blame – for that fact.  Over the last four decades, Norquist and other anti-tax fundamentalists have successfully turned the GOP into the party of tax cuts. Republican strategists and officials routinely raise the specter of higher taxes to attack the Democratic opposition.  Signing Norquist’s “taxpayer protection pledge” has become a rite of passage for all GOP candidates for office; apostates often face well-funded primary challenges from tax cut purists.  The strength of this tax-cut dogma is such that conservative lawmakers like Pat Toomey are unable to accept Democrats’ offer to cut $10 of spending for $1 of tax increases!

This single-minded approach to tax policy has become the defining feature of the GOP.  But, this was not always the case.  In 1969, for example, facing a popular uprising against a tax code “rigged” against ordinary people, GOP President Richard Nixon defended the federal income tax as “giving life to the people’s purpose in having a Government to provide protection, service and stimulus to progress.” The transformation of the GOP into the “tax cut party” began half way through Nixon’s troubled presidency in context of a profound economic collapse.  As the post-WWII Keynesian economic consensus weakened, new economic theories, chief among them supply-side economics, competed openly in the policy and political marketplace.

At first, some may have been genuinely convinced by economic arguments that tax cuts would help to grow the economy and lower the nation’s debt.  After all, this was exactly what happened in the mid-sixties after President Lyndon Johnson successfully convinced Congress to slash tax rates for all Americans. But, even at the beginning, it was clear that the GOP’s commitment to tax cuts had as much to do with political branding as with economics.  In an interview not too long ago, Norquist may have given away more than he meant to when he admitted that he first envisioned his organization’s taxpayer protection pledge as a way for the GOP to win elections by branding “itself as the party that wouldn’t raise taxes.”

The strategy has worked well for the GOP.  For decades, the party has benefitted from its reputation as what Wall Street Journal writer and early tax-cut apostle Jude Wanniski approvingly dubbed the “Santa Claus of Tax Reduction.” By linking its main policy objective – lower taxes for the wealthy and corporations – to what former Reagan budget director David Stockman once called the “Trojan horse” of across-the-board tax cuts for lower income citizens and rebranding itself as the tax cut party, the GOP has successfully challenged Democrats’ mid-century control over American politics. 

This would all be fine if the supply-side cuts had done what they were supposed to do.  But they didn’t. Indeed, the GOP’s tax cut fundamentalism may be a political winner – at least in the short term.  But the party’s take-no-prisoners attitude about any and all tax cuts has become a dangerous basis for policymaking.

Unfortunately, Democrats share the GOP’s tax aversion. While the GOP may have more successfully branded itself as the tax cut party, mainstream Democrats are almost as opposed to tax hikes as their Republican counterparts.  As political analyst Ezra Klein pointed out recently, the difference between Republicans and Democrats – at least on the tax question is pretty small.  “Republicans,” Klein writes, “don’t want to raise taxes on anyone.  Democrats don’t want to raise taxes on almost anyone.” 

Democrats’ aversion to tax increases – unchallenged by the responses from both Austan Goolsbee and Rep. Chris Van Hollen in yesterday’s debate – has a long and distinguished pedigree. In the decades after the Second World War, liberals worked to improve and expand the economic and social security programs put in place in the 1930s. Rather than relying on higher income taxes to underwrite the New Deal, WWII and postwar social compacts, however, liberals instead relied on more indirect means – including tax revenues automatically generated by economic growth, earmarked payroll taxes, and hidden tax spending programs like the home mortgage interest deduction.  Indeed, despite the party’s reputation for taxing and spending, postwar Democratic lawmakers avoided income tax increases like the plague.  President John Kennedy, for example, promised to take the nation to the New Frontier, at the same time as he slashed corporate taxes.  His successor launched the Great Society and the War on Poverty while pushing a massive tax cut through Congress. 

It’s time to pay up.  The country now faces major, but not insurmountable obstacles, including but not limited to rising deficits, mounting debt, and major shortfalls in popular programs like Social Security and Medicare. The country does not have to go bankrupt, but both liberals and conservatives will have to abandon their traditional and favored policies of “tax cut and spend.”

We can get our nation’s fiscal house in order. But those who think this can be done without any tax increases are just kidding themselves.

Molly Michelmore is an Associate Professor of History at Washington and Lee University in Lexington, Virginia. A former Congressional staffer and Miller Center fellow, Michelmore’s first book, Tax and Spend: Welfare, Taxes and the Limits of American Liberalism, was published by the University of Pennsylvania Press in 2012. 

Date edited: 08/30/2012 (1:54PM)


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