Is Roth-Kemp the successor to Proposition 13?
Roth-Kemp, in case you haven't heard, is legislation introduced by Sen. William V. Roth Jr. (R-Del.) and Rep. Jack F. Kemp, (R-N.Y.) that would reduce personal income tax rates by about a third, lower the corporate tax rate from 48 percent to 45 percent and increase the floor for the maximum corporate rate to $100,000 (it's now three years and would result in a staggering cut of about $80 billion in tax revenues (in cofistant 1978 dollars).
Though Roth-Kemp has been around for awhile, it bears a striking similarity to Proposition 13.
Like California's Proposition 13, Roth-Kemp is often described as outlandish, irresponsible and demagogic. Like Proposition 13, it is simple, direct and capable of being understood by the average voter. A family making $20,000, for example, would have its federal income taxes reduced from $2,480 to about $1,600. Even when the effect of inflation (which kicks people into higher brackets) and higher social security taxes are counted, this reduction represents a sizable real tax cut.
No one can tell, of course, whether Roth-Kemp will duplicate Proposition 13's success. As a political issue, it certainly doesn't have national recognition now. Checks with both Republicans and Democrats indicate that it has surfaced in only a handful of congressional races. But the Republicans seem eager to exploit it, and the sponsors are almost fanatical in their advocacy.
It's not hard to understand why. For, if the measure's economics leave considerable room for skepticism, its political attractions are undeniable.
A good political issue, by definition captures and channels people's random emotions. It gives them a sense of belonging to something bigger than themselves, of having opinions - fears, hopes - that are seen as respectable and responsible. It succeeds in identifying vague feelings with a specific idea, movement or political figure.
Proposition 13 did this because it responded directly to a pervassive mood of mistrust. Although Big Business, Big Labor and Big Government - along with various other giant institutions - have fallen in public esteem, they are not really today's popular villians. After all, somewhere along the line, almost everyone belongs to or benefits from Big Business, Big Labor or Big Government.
Today's villians are the elusive "then": distant authority figures. It doesn't matter whether they are politicans, bureaucrats, academics, newspaper reporters, television commentators or business executives. It they presume to tell people what to think or do, they are resented. In a country that exalts freedom, people want to feel in control.
Proposition 13 caught this anger, just as Jimmy Carter caught it with his anti-Washington crusade and George C. Wallace caught it with his shirt-sleeves populism. The more Proposition 13 flouted the conventional wisdom, the more popular it became. The more it defied the experts - politicans, economists, labor leaders and business executives - the more popular it became.
Proposition 13 is unabashedly and unashamedly selfish. Californians voted for it not only because they are squeezed by inflation, but also because they have been told so often that individual selfishness is socially irresponisble. In effect, they reasserted their individuality by reclaiming their taxes.
Whether Roth-Kemp can tap this popular vein remains to be seen, but it's worth pointing out that the measure is not the economic panacea its sponsors say it is.
Basically, they have adopted the argument that President Kennedy used when he urged a broad tax cut in 1963: lower taxes will stimulate the economy, create more jobs and, in the end, produce more government revenues. However, their reasoning is different. Kennedy's economists argued that the tax cut was needed to stimulate demand. The sponsors of Roth-Kemp contend that high tax rates have discouraged people from working harder and business from investing more.
Allow people and companies to keep more of their earnings, the argument runs, and folks will work harder or longer, firms will invest more and the economy will grow faster. Economist Arthur B. Laffer coined this idea in the so-called Laffer Curve, and former Wall Street Journal editorial writer Wanniski is attempting to popularize it in a book, The Way the World Works (Basic Books, 1978).
As common sense, there's nothing wrong with this notion. Obviously, at some point, taxes become suffocating. Many economists think Great Britain passed that point long ago. The same thing may have happened in the United States.
No one really knows, but Roth-Kemp supporters almost certainly have overestimated the immediate benefits of their proposal and seriously underestimated its inflationary potential. Norman B. Ture, a Washington economist, did the estimates of Roth-Kemp's impact. In the first year, his economic model predicted, tax revenues actually would increase over the revenues raised by current law, gross national product would rise $170 billion, "full-time" jobs would increase about 2 million and capital investment would jump $113 billion.
Some of these estimates strain credibility. A $113 billion increase in investiment, for example, would be more than 30 per cent in "real" dollars (adjusted for inflation). That's slightly more that the increase in investment levels between 1965 and 1972. This would be an investment boom without precedent. Even if business wanted to increase investment that much, shortages in supplies of the needed machinery and materials almost certainly would arise.
And that's the Achilles' heel of this proposal. Without offsetting cuts in federal expenditures, such huge tax reductions wold risk creating an enormous surge in spending that would lead either to a dangerous acceleration of inflation or a crippling credit crunch. The Republicans have talked in generalities about reducing spending, but have yet to write a laundry list. And because so much of federal spending involves defense or social security, any list of substantial cuts is bound to be unpopular.
But in elections, details count for less than slogans. And the Republicans may push this one for all it's worth.