Tax cuts aren't everything
Bold tax reform is necessary but not sufficient.

Individual income tax return form by Shutterstock.com

Article Highlights

  • April 15 is Tax Day in America. But it seems like every day is Tax Day on the right.

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  • It will be more difficult for the US to maintain the average post–WWII tax burden given the aging of American society.

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  • Bold tax reform is necessary to upgrade the growth potential of the US economy, but it isn’t sufficient.

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April 15 is Tax Day in America. But it seems like every day is Tax Day on the right. Activists, policymakers, and wonks devote an incredible amount of thought and energy to fighting tax-hike efforts and to devising ways to reform the current tax code. During the GOP presidential primaries, not one Republican candidate accepted the idea of a budget with even a molecule of higher taxes in it. And all of them put a big tax-cut plan at the center of their economic agendas — even when, like Mitt Romney, they would have preferred not to. Of course, many Republican candidates at all levels dutifully sign the Americans for Tax Reform pledge promising not to raise taxes. As reporter and columnist Robert Novak once put it: “God put the Republican Party on earth to cut taxes. If they don’t do that, they have no useful function.”

Taxes are an understandable obsession. Ronald Reagan’s Republicans wielded tax cuts as a cudgel to smash Democrats’ five-decade lock on political power in Washington. The tax-cut message helped rebrand the GOP as a party of growth and opportunity and prosperity rather than of austerity and green-eyeshade accountants and tax collectors for the liberal welfare state. Even better, smart politics made for smart policy. Marginal income-tax rates were far too high when Reagan took office in 1981. And the tax code wasn’t indexed for inflation, causing bracket creep where nominal income gains pushed taxpayers into higher tax brackets.

 


The result was a tax code that reinforced 1970s stagflation instead of creating a fertile environment for growth. The Reagan tax cuts freed the economy from that trap and contributed greatly to a generation-long boom in the U.S., one that also led to a global tax-cutting craze. By the 1990s, even Democrats were cooking up flat-tax plans. In The Audacity of Hope, Barack Obama grudgingly conceded that the “high marginal tax rates that existed when Reagan took office may not have curbed incentives to work or invest . . . but they did lead to a wasteful industry of setting up tax shelters.”

But there are few permanent victories in Washington. While President Obama has publicly endorsed keeping most of the Bush tax cuts, he surely would prefer dumping all of them. It’s also clear that Democrats want to deal with the approaching tidal wave of entitlement debt by adopting a value-added tax, which would raise the tax burden far above historical levels. In addition, liberal economists now frequently make the case for returning to the 70–90 percent marginal rates that prevailed from the 1930s through 1970s. This is no time for the right to give up the tax fight.
"'Pro-growth' economic policy must be full-spectrum policy — not just talking-point shorthand for 'tax cuts.'" -- James Pethokoukis

 

But conservatives need to pick their battles intelligently. It will be exceedingly difficult for the U.S. to maintain the average post–World War II tax burden given the aging of American society and the necessity of remaining a global military superpower. Rates won’t be returning to the Coolidge-era levels that the House GOP continues to push for. Instead, better to push for changes to make the code more pro-investment by reducing corporate tax rates (and eliminating crony-capitalist loopholes) and more pro-family by creating an expanded child tax credit to offset income and payroll taxes.

Bold tax reform is necessary to upgrade the growth potential of the U.S. economy, but it isn’t sufficient. Conservatives, particularly GOP politicians, need to show as much — if not more — policy obsession, energy, and innovation in areas such as education, health care, patent and copyright reform, and public investment in infrastructure and basic research. The Novak Declaration was a good fit for the 1980s but falls short of meeting the economic challenges of 2013 America. “Pro-growth” economic policy must be full-spectrum policy — not just talking-point shorthand for “tax cuts.”

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.

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