The Republican party’s raison d’être is cutting taxes. It may even be its divine commission. God put Republicans on earth to cut taxes, the conservative columnist, Robert Novak, once said, and failure to do that means “they have no useful function”.
John Kasich, Jeb Bush, Marco Rubio, Donald Trump, Dr. Ben Carson, Ted Cruz, Carly Fiorina and Rand Paul pose during a photo opportunity before the debate. 11/11/2015 | Reuters
Republicans should pray for a new purpose. Their standing with middle-class voters is little improved from 2012. If Hillary Clinton becomes the 45th US president, it would be the first time since 1948 that the Republicans have lost three consecutive elections. Their “supply-side” orthodoxy would merit much of the blame. Big tax cuts, particularly for the wealthiest, do not work in an age of high inequality and heavy debt. Republicans need an economic agenda that respects markets while also recognising the challenges facing America and its anxious middle class.
Many of the party’s 2016 candidates seem to disagree that change is needed. Many have received the blessing of economist and supply-side evangelist Arthur Laffer and subjected themselves to vetting by the Committee to Unleash Prosperity, a group of era supply-siders from the era of President Ronald Reagan, including Mr Laffer and publisher Steve Forbes. Almost all have released economic plans built around “pro-growth” tax cuts costing trillions. At last month’s CNBC-hosted presidential debate, frontrunner Donald Trump dismissed a model showing his plan would reduce federal tax revenue by $10tn over the next decade: “The economy would take off like a rocket ship.”
Supply-side economics, primarily tax cuts but also deregulation and tight monetary policy, has driven Republican economics for decades, to great electoral success. But there are good reasons to view the next election as a last hurrah for Republican-style supply-side policy.
First, voters do not much care about taxes. Unlike a generation ago, more than half think their taxes are fair, according to a Gallup poll. Americans are sceptical low taxes produce broadly shared economic growth. A YouGov survey found only 29 per cent agreed lower taxes on the wealthy and business would generate higher incomes for all. The results are hardly surprising given recent history. The 1990s started booming after President Bill Clinton raised taxes. And the 2000s economy flagged despite George W Bush’s tax cuts.
Second, America’s fiscal situation makes deep tax cuts implausible. The federal debt-to-gross domestic product ratio is three times higher than when Reagan took office. There is more spending en route in the form of unfunded government pension and healthcare programmes. Starting in 2019, according to the Congressional Budget Office, such “mandatory” spending will begin an inexorable ascent as a share of GDP. Reforms to limit that rise will require higher taxes to win Democratic approval in Congress. Budget-busting tax plans seem ever more beside the point.
Third, tax cuts look like an answer desperately searching for a problem. Today’s top US marginal tax rate is 39.6 per cent, compared with 70 per cent before the 1981 Reagan tax cuts. The US is almost certainly not an example of the veracity of the Laffer curve, where lowering rates sometimes boosts tax revenue. Nearly half of households pay no federal income tax. And while targeted reform might help US economic dynamism, faster growth seems insufficient for broadly shared prosperity. Middle-class incomes have stagnated as inequality has risen.
America does need “supply-side” reform, but in ways that sync with how most economists use the term: expanding labour supply and boosting worker productivity. This would include business tax and regulatory fixes, but also policies to which Republican supply-siders give short shrift, such as education reform and public investment in infrastructure and science research.
There are signs candidates are starting to wriggle out of the supply-side straitjacket. At this week’s Republican presidential debate in Wisconsin, Marco Rubio said a larger tax credit for families was just as important as tax cuts for business. Ted Cruz would institute a value added tax, an efficient way to boost revenue for old-age programmes. While 1980s-style supply-side doctrine still rules the Republican roost, it may not beyond November 2016.
The writer is a scholar at the American Enterprise Institute
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