The Back Of The Napkin That Does Everything You Need It To

Kevin Williamson at National Review:

There are two schools of thought about the Reagan tax cuts. The conventional conservative view: They spurred investment, entrepreneurship, and real economic growth, helping to resuscitate the post-Carter economy, and, by doing so, they paid for themselves. The conventional liberal view: They were an ill-considered product of starve-the-beast ideology and produced crippling deficits, inaugurating a new era of fiscal irresponsibility only briefly transcended during the golden years of the Clinton presidency.

Here’s a different take: They never happened.

Properly understood, there were no Reagan tax cuts. In 1980 federal spending was $590 billion and in 1989 it was $1.14 trillion; you don’t get Reagan tax cuts without Tip O’Neill spending cuts. Looked at from the proper perspective, we haven’t really had any tax cuts to speak of — we’ve had tax deferrals. Reagan and his congressional allies had an excuse in the considerable person of Speaker O’Neill. But George W. Bush and the concurrent Republican majorities in both houses of Congress didn’t manage to cut spending, either. Part of that was circumstances — 9/11, Afghanistan, Iraq, the subprime meltdown — but part of it was the fact that a poorly applied supply-side analysis has infantilized Republicans when it comes to the budget. They love to cut taxes but cannot bring themselves to cut spending: It’s eat dessert first and leave the spinach on the table.

There is some evidence that this is both bad politics and bad policy. Many conservatives were disheartened by the Republican spending excesses of 2001–06, and abandoned the GOP in the elections of 2006 and 2008. And you may have noticed that our parks and public spaces are from time to time filled with rowdy tea-party demonstrators hollering for Washington to drop anchor post-haste on the USS Appropriations, which is nonetheless steaming on at a nauseating clip. Spending cuts are always popular in theory and detested in practice, but the deficit is now truly terrifying, and, fortunately for Republicans, it is owned by Barack Obama and Nancy Pelosi. Our gross national debt is about 80 percent of GDP today and will be nearly 100 percent by 2012. If the government applied any sort of reasonable accounting standard to its future liabilities — if it were taking the same write-downs on Social Security and Medicare that the Fortune 500 are taking on Obamacare — then our real liabilities would far exceed GDP. It’s ugly, and the numbers suggest that we aren’t going to grow our way out of it: Despite all those pro-growth tax cuts, our deficits continue to grow faster than our economy. That’s been especially true during the Great Recession, but even during periods of strong economic growth, there has been nothing to indicate that our economy is going to grow so fast that it will surmount our deficits and debt without serious spending restraint. This should be a shrieking klaxon of alarm for conservatives still falling for happy talk about pro-growth tax cuts and strategic Laffer Curve optimizing.

Some people are more sensible about that Laffer Curve talk. Laffer, for instance. Arthur Laffer, whose famous (and possibly apocryphal) back-of-the-napkin diagram launched supply-side tax policy, readily concedes that the growth effects of tax cuts are oversold in the political debate. “Does every tax cut pay for itself? No. I think Irving Kristol wrote that, once — and then did a pretty good job of arguing for it. But if some guy running for Congress in Clayton County, Texas, says all tax cuts pay for themselves, what do we want to do? Go after him with a shotgun? Sure, they’re going to cite me, and there’s very little I can do about it. But there’s the same amount of ignorance on the other side, ignoring the economic feedback effects of tax cuts.”

Veronique de Rugy at The Corner:

What’s great about Williamson’s article is that he masterfully walks the difficult line of coming out against supply-side economics but not against tax cuts. The argument is the following: Not every tax cut pays for itself. If they don’t and you don’t cut spending, you end up with a bigger deficit. If they do pay for themselves and you don’t cut spending, it’s likely that the increased revenue will be used for even more spending and the government will grow. So, basically, the theory called “starve the beast” doesn’t actually shrink the size of government.

Full disclosure: I used to believe in the starve-the-beast theory. I used to think that every tax cut paid for itself. I don’t anymore. More importantly, I don’t believe that tax cuts without spending cuts will reduce the size of government.

Does it mean I think we shouldn’t cut taxes if we don’t cut spending at the same time? I don’t know; I am conflicted about that. I love the growth that comes from cutting taxes. I want more of it. Yet I know it’s not enough. Debt matters, too, and spending needs to be cut dramatically, because tax cuts do not starve the beast — the government keeps on spending and growing, no matter who is in power. What I really want is a smaller government. (Actually, what I really want is small government.) Tax cuts alone can’t do. The question is, are they making things worse?

Jim Antle at The American Spectator:

But I think we should be careful not to throw the baby out with the bathwater here. Understood as reductions in marginal income tax rates, the Reagan tax cuts did happen. They did save taxpayers more than $2.5 trillion. They did moderate the upward trajectory of taxes as a percentage of the economy.

The first Reagan tax cut lowered marginal income tax rates by 25 percent across the board. The top marginal income tax rate was eventually reduced from 70 percent all the way down to 28 percent. Income taxes were finally indexed to inflation, eliminating bracket creep. The number of tax brackets was reduced from 14 to just two. Millions of low- to moderate-income Americans were dropped from the tax rolls entirely.

Many of those policies have been eroded — the top tax rate is higher today; there are more tax brackets, as the near-flat tax created by the Tax Reform Act of 1986 didn’t last very long — but none of them have been completely repealed. In addition to the political reasons, this is because there were salutary economic effects. There is a strong case to be made that tax cuts played a role alongside tight money in the policy mix that finally whipped stagflation. And while tax increases to cope with the rising deficit began as early as 1982, Reagan was a net tax cutter and these lower rates were compatible with historic revenue growth over the fullness of time.

This doesn’t change any of Williamson’s main points: We are not as far out on the Laffer Curve as we were before Reagan (though if spending isn’t controlled, we will be again); tax cuts are unsustainable without spending cuts; the Republican Party — with the encouragement of too many conservatives — has increasingly embarked upon a path of high-borrowing “don’t-tax-and-spend.” But Reagan’s tax success was a success. It was simply a success endangered by his failures on spending.

Ross Douthat:

This is an extremely important issue for the future of conservative governance. Eventually, the right will be back in power — whether in Congress, the White House, or both. When that day arrives, conservatives will inherit a fiscal situation that will be dire at best, catastrophic at worst. They can respond responsibly, by eschewing the dream of Reaganesque tax cuts and taking the political risks necessary to actually restrain federal spending. Or they can be irresponsible, and tell themselves fairy tales about just growing our way out the current fiscal hole. The choice is theirs, but it’s the obligation of conservative wonks and intellectuals to give them a shove in the right direction — and good for Williamson (and NR) for doing so.

Daniel Mitchell at Cato:

Interestingly, the European Central Bank just released a new study showing that there are substantial Laffer Curve affects and that lower tax rates generate large amounts of revenue feedback. In a few cases (Sweden and Denmark), the researchers even conclude that some lower tax rates would be in that rare category of self-financing tax cuts. But the key point from this ultra-establishment institution is that changes in tax rates do lead to changes in taxable income. This means it is an empirical question to determine the revenue impact. Here’s a key excerpt from the study’s conclusion:

We show that there exist robust steady state Laffer curves for labor taxes as well as capital taxes. …EU-14 countries are much closer to the slippery slopes than the US. More precisely, we find that the US can increase tax revenues by 30% by raising labor taxes but only 6% by raising capital income taxes, while the same numbers for EU-14 are 8% and 1% respectively. …We find that for the US model 32% of a labor tax cut and 51% of a capital tax cut are self-financing in the steady state. In the EU-14 economy 54% of a labor tax cut and 79% of a capital tax cut are self-financing. We therefore conclude that there rarely is a free lunch due to tax cuts. However, a substantial fraction of the lunch will be paid for by the efficiency gains in the economy due to tax cuts.

Contrary to over-enthusiastic Republicans and deliberately-dour Democrats, the Laffer Curve/supply-side economics debate is not a binary choice between self-financing tax cuts and zero-impact tax cuts. Yes, there are examples of each, but the real debate should focus on which types of tax reforms generate the most bang for the buck. In the 1980s, the GOP seems to have the right grasp of this issue, focusing on lowering tax rates and reducing the discriminatory tax bias against saving and investment. This approach generated meaningful results. As Nobel laureate Robert Lucas wrote, “The supply side economists, if that is the right term for those whose research we have been discussing, have delivered the largest genuinely free lunch that I have seen in 25 years of this business, and I believe we would be a better society if we followed their advice.”

But identifying and advocating pro-growth tax reforms, as Williamson notes, is just part of the battle. The real test of fiscal responsibility if controlling the size of government. Republicans miserably failed at this essential task during the Bush year. If they want to do the right thing for the nation, and if they want to avert a Greek-style fiscal collapse, they should devote most of their energies to reducing the burden of government spending.

E.D. Kain:

Obviously there are benefits to cutting taxes when those taxes have reached truly burdensome levels, but unless spending is also curtailed, this is hardly an act of fiscal conservatism. Nor does starve the beast work in a system in which the primary goal of all lawmakers is reelection. Williamson points out that it’s easy to sell tax cuts but nearly impossible to sell reductions in spending. He suggest conservatives “develop a rhetoric in which “spending” and “taxes” are synonyms, so a federal budget with $1 trillion in new spending means $1 trillion in new taxes — levies on Americans today or on our children tomorrow, with interest.”

In the meantime, serious politicians in both parties need to stop passing the buck. At some point we’re going to need to come up with new revenues from higher taxes or new taxes like the VAT. We’re also going to need to cut spending – and not just around the edges. Entitlement spending and defense spending are not only cash cows but sacred cows, and until we have legislators brave enough (or stupid enough) to go after those, we’re going to keep barreling headlong toward fiscal insolvency. Some combination of spending cuts and tax increases is in our future. The question is only a matter of when.

I am made only slightly more optimistic by the fact that this is an article in the National Review, a place not well known for its questioning of GOP orthodoxy.

Jonathan Chait at TNR:

Obviously, I don’t share the conservative movement’s goals. The trouble with the right’s embrace of magical thinking is that it makes even negotiation over the size of government impossible. In a rational world, Democrats and Republicans should be able to define their desired level of taxes and spending and meet somewhere in the middle. But this negotiation is impossible as long as Republicans continue to be so detached from fiscal reality that they can’t even advance their own interests.

Anti-tax absolutists still have a firm firm grip upon the Republican Party and the conservative movement. They have spent a good thirty years drumming magical thinking on taxes into the skull of every dittohead, Young Republican, Fox News watcher, or admirer of Ronald Reagan or George W. Bush. It will take a long, long time before the party is ready again to enter have a discussion of fiscal policy that merely engages with reality. But Williamson’s article is a pretty remarkable first step.

Bill Scher and Peter Suderman at Bloggingheads

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