A specter is haunting the Republican Party—the specter of Ronald Reagan.
Ever since his two landslide victories, conservatives have treated it as received wisdom that cutting taxes as much as possible is the onefold path to economic and political nirvana. Well, make that cutting the top tax rate as much as possible. The idea, known as supply-side economics, is that the lower the top rate, the more top earners will work and invest, and the more growth there will be to—keep waiting for it—trickle down to everyone else. Never mind that this hasn't really worked in the past and couldn't even work in the present, at least not that much, now that the top rate is already pretty low. This is still an orthodoxy that Republicans are barely allowed to deviate from, and only then if they say three Hail Reagans as penance.
Just look at what happened to Senator Marco Rubio and Mike Lee's tax plan. It started out as what was supposed to be a warm and cuddly kind of supply-side economics that was like the Bush tax cuts only a little less regressive. But then the CNBC class decided that this crossed the line into heresy, and demanded more tax cuts for themselves to appease the pro-growth gods. They got them. The result is what would in all likelihood be an even bigger budget-busting giveaway to the top 1 percent than anything George W. Bush ever dreamed up. That's the price "reform conservatives," or reformocons, apparently have to pay to get the rest of the Party to go along with anything that helps the middle class. And it's even higher than it used to be.
See if this sounds familiar. A Democratic president comes into office offering hope during a downturn. The Republican minority, though, refuses to negotiate with him, and squawks that his policies will only scare the private sector into an even deeper slump. Apparently raising the top marginal tax rate to 39.6 percent is the first step on the road to serfdom. (I'm pretty sure that's in the Communist Manifesto). Now for awhile this looks like a smart political strategy. The still-sluggish economy lets Republicans win back Congress during the midterms, and, from there, they manufacture one crisis after another to try to weaken the president so that he loses reelection. But then things fall apart. The president still wins a second term, in large part, because middle-class voters don't feel like Republicans' super supply-side tax plan would help them. Even worse, the economy starts picking up and markets start taking off, enough that unemployment will be under 5 percent and stocks will be at all-time highs by the time the next election rolls around. So much for socialism killing the recovery. What's to be done? That's the question George W. Bush faced in 2000, and that, well, Jeb Bush (or Scott Walker or Marco Rubio) will also face in 2016.
History might not repeat, but it sure does—no, it just repeats.
George W. Bush's big idea was that instead of trying to cut the top rate from 39.6 to, say, 28 percent, Republicans should settle for 35 percent. That way there'd be money left over—which is a bit of a misnomer since this was all deficit-financed anyway—for them to expand, among others, the Earned Income Tax Credit and the Child Tax Credit. That way there'd be something for the middle class. But did Bush get the high priests of the supply-side to agree to this? Well, by giving them the real goodies: a capital gains tax cut from 20 to 15 percent, a dividend tax cut from 39.6 to 15 percent, and an estate tax cut eventually all the way down to zero. That's why, even though this did boost middle-class after-tax incomes by 2.2 percent, it boosted the top 1 and 0.1 percent the most, up 5.6 and 6.9 percent, respectively. But that didn't stop the Bush administration from claiming that this was really about helping someone like a single waitress with two kids. Or stop the conservative Heritage Foundation from saying that, rather than being a fiscally irresponsible exercise in upward redistribution, the Bush tax cuts would actually pay off the national debt by increasing growth so much that revenue wouldn't fall that much.
That's the same big idea that Marco Rubio and Mike Lee have today. They also want to cut the top rate from 39.6 to "only" 35 percent, and use the money that could have gone into cutting it even further to expand the Child Tax Credit from $1,000 to $3,500 instead. Now that credit would only be refundable against payroll and income taxes—so if you didn't owe any, you wouldn't get any help—which is why most of its benefits would go to the middle and upper-middle classes. The nonpartisan Tax Policy Center estimates that, altogether, this plan would raise after-tax incomes 1 percent for the bottom 40 percent, around 2.4 percent for the next 50, 2.8 percent for the top 1, and 3.8 percent for the top 0.1. That adds up to a lot of red ink, though: $2.4 trillion more in deficits over the next decade, to be exact.
So they went back to the drawing board, and sketched something that would blow up the budget even more. Why? Well, the supply-siders decided that this plan wasn't conservative enough, if not an outright "triumph of liberalism." And it was going a lot more than cutting investment taxes to 15 percent for them to change their minds. That's why the new Rubio-Lee plan would cut capital gains taxes from 23.8 percent to zero, dividend taxes from 23.8 percent to zero, and the estate tax from 40 percent to zero. That's a lot of zeroes. Not only that, but it would also cut the corporate tax rate from 35 to 25 percent, stop taxing overseas earnings, and allow businesses to deduct all their expenses at once. Nobody's run the numbers yet, but it's more than safe to say that most of these new tax cuts would go to the top 1 percent. Just think about this. The Tax Policy Center says that getting rid of all investment taxes would, on average, give someone in the middle 40 to 60 percent a $66 tax cut—don't spend it all in one place!—while the top 1 percent would get $61,891 and the top 0.1 percent would get $401,554.
It's hard to imagine this would do anything but explode inequality and the deficit by around $4 trillion or so. The conservative Tax Foundation is giving it the old college try, though, by claiming that this would increase growth so much that, rather than costing the government $414 billion a year, it would increase revenues by $94 billion a year. That's what George W. Bush would call some fuzzy math.
Reform conservatism is just compassionate conservatism with even more tax cuts for the rich. Now it's true that a lot of economists think a progressive consumption tax—where investment income, or any for that matter, isn't taxed, and spending is instead—would be the best one. But that's not what Rubio and Lee are proposing. This is the old George W. Bush formula of tax cuts for the rich and tax credits for the rest, just on steroids.
If this is reform conservatism, what exactly is getting reformed?