Republican Tax Policy

Republican tax policy is so big a target it’s almost hard to know where to begin. But I’ll start with the most basic fact: Republic policy is to cut taxes. In general, Republicans will always push for lower taxes. Income taxes? Lower. Capital gains? Lower. Corporate taxes? Lower. Got yourself a financial crisis? Lower taxes will solve your problem!

The Republican quest for lower taxes is driven by three major impulses, one philosophical, one economic, and one greedy. I’ll discuss each impulse in turn.

The philosophical impulse is, broadly speaking, that the government shouldn’t take what you earn. As the current GOP platform puts it, not only should you “keep more of what you earn,” but “government should tax only to raise money for its essential functions.” But this too has multiple components. Saying “essential functions” relates to the Republican emphasis on small government. I already dealt with that ridiculous canard here, so I shall discuss it no further.

But keeping more of what you earn, to Republicans that’s just part of liberty and freedom, Mom and apple pie. As the Club for Growth puts it, they believe that “opportunity come(s) through economic freedom.” I get that; part of the American foundational myth is freedom from the heavy hand of government – no taxation without representation and all that. But notice that the famous phrase does NOT say “no taxation,” it just demands fair representation. In fact, Section 2 of the Constitution, the fifth paragraph in the entire document, condones taxation. The Founders didn’t equate freedom with reduced taxation.

The pairing of freedom and low taxes is merely a Republican shibboleth, one that we are all supposed to believe because they have repeated it so often. Yet why must society accept their definition of freedom? After all, cannot freedom also mean living in a safe, just and ordered society? That society requires government, and government requires taxes. Or, as Oliver Wendell Holmes said, “taxes are the price of civilization.”

The second Republican impulse to lower taxes is economic. The theory is that lowering taxes stimulates growth.  Again, from the GOP platform: “Republicans lowered taxes in 2001 and 2003 in order to encourage economic growth.” Yes, under standard Keynesian economics, a tax cut will put more money into the economy and thereby stimulate consumption. But the Republican view is based more on the theory that tax cuts fuel productive investment. That theory is based primarily on the Laffer Curve. Dr. Laffer himself: “The higher tax rates are, the greater will be the economic (supply-side) impact of a given percentage reduction in tax rates.”

Famous for being sketched on a cocktail napkin in a Washington DC restaurant, the Laffer Curve states that at 100% taxation the government will make no money, since all activity will cease. Sure, and when the sun explodes, all activity will also cease. Duh. But that doesn’t mean that lowering taxes inevitably leads to more activity, which is how Republican supply-siders generally interpret Laffer. Simple common sense rejects that implication of Laffer; does anyone really believe that investor X or entrepreneur Y will refuse to build a company because their gains will be taxed at 60% instead of 30%? That’s ridiculous. And all empirical studies agree. No study supports Laffer effects at any tax rate below 90%.

Here are just a few links to various studies and summaries:

• Princeton economist Alan Blinder
• University of Oregon economist Mark Thoma
• UC Berkeley economist Brad DeLong
• The Atlantic
• Time magazine
• The Washington Post
• IMF economists
• Economist Stefan Karlsson of the nearly libertarian Ludwig von Mises Institute

But Harvard economist Jeff Frankel put it best: “The Laffer Proposition, while theoretically possible under certain conditions, does not apply to US income tax rates:  a cut in those rates reduces revenue, precisely as common sense would indicate.”

Bottom line: this Republican concept that lowering tax rates will unleash torrents of investment and innovation is rubbish. It defies common sense, and every academic study proves it to be wrong.

The third and last Republican impulse driving taxes lower is pure greed. Quite simply, they want to keep more of the money they make. And again, I understand that; nobody really likes giving money away, especially to a government that may spend your money on things you don’t support.  But the Republicans driving this policy aren’t exactly Joe Sixpack, working class stiffs hoping to keep more of their hourly wages. Instead, they are folks like Stephen Moore and Grover Norquist, white middle-class intellectuals who have never had to worry about money or needed the support that tax dollars provide to the less fortunate. Or, even more pointedly, they are Wall Street titans like Henry Kravis and Steve Schwarzman, of KKR and Blackstone Group, who are worth billions and really don’t need the extra money. An article in yesterday’s Wall Street Journal noted that these and other Wall Street bigwigs were finally supporting McCain because “ ‘Reality set in,’ one fund-raiser said. ‘Donors realized they could face an Obama administration next month.’ They are petrified they will face steep increases in personal and corporate tax rates, this person said.” Schwarzman took home over $700 million when Blackstone went public. Does he really need a lower tax rate on his future income?