America's Tax Policy

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This is the seventh part of the debate. See also Part 1, Part 2, Part 3, Part 4, Part 5, and Part 6. In this last back-and-forth, they return to discussing Chait's book directly. Norquist takes the first shot.

Dear Jon,

A central theme of your book The Big Con--available at bookstores everywhere--is that first the Republican Party and then the nation has been sold a bill of goods by silly supply-siders whose theories of economic growth are wrong, refuted by reality, and yet somehow those espousing and implementing those policies keep getting elected with infuriating regularity.

The bi-partisan consensus of the 1950s, where everyone was for big government, has been undermined by Laffer/Wanniski/Gilder, and views once beyond the pale are now mainstream.

You do sound a little like some of my social-conservative friends who don't understand how we went from "Ozzie %amp% Harriett" to "Will %amp% Grace." The nation has changed.

In the 1950s the state disposed of the lives of its citizens promiscuously. We had a peacetime draft--and no draft riots. We had a top marginal tax rate of 91 percent. The state set prices for buses, airlines, trucking, and banking. The phone company was a regulated monopoly. So were banks and insurance companies. TV and radio licenses were dispensed and controlled by the state. We had state-enforced racial segregation.

A movement toward greater economic liberty arose. Milton Friedman and the Gilder guy you don't like were leaders in the effort to end the draft. The price controls on oil dating from the Nixon era were ended by Reagan. The price controls on airlines, trucking, and buses ended. Telecommunications, banking, and insurance had their regulatory schemes loosened.

John F. Kennedy, who like Laffer/Wanniski/Gilder was not a trained economist, cut marginal tax rates across the board 23 percent. He explained supply-side economics clearly:

Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. ... It is a paradoxical truth that tax rates are too high today and tax revenues are too low--and the soundest way to raise revenues in the long run is to cut rates now.

You do point out in the your book that a 91 percent marginal tax rate means that earning that last $100 nets you after tax only $9. When Kennedy cut that rate to 70 percent the new after-tax take of earning $100 was $30. When Reagan cut the tax rate to 50 percent, and then to 28 percent, that last $100 earned let you take home $72.

So under that socialist Ike, working for an extra $100 on Saturday netted you $9. Under Reagan it netted you $72. The higher return to work or investment might encourage folks to work and invest more. The converse is that taking Saturday off (not earning the $100) means sacrificing $72 not $9.

I fail to see how Kennedy's insight is wacky. In your book you recognize that marginal tax rates affect behavior.

The insights of the supply-siders had tremendous policy implications, but they were not revolutionary--just common sense and classical micro-economics. People respond to the information in prices. Taxes change prices. Raise the tax on something and you raise the price. But taxes are particularly pernicious as they send false signals to the economy. Higher gas prices tell consumers to conserve and tell producers to go find and produce more oil. But increasing taxes on oil tells consumers to conserve but sends no "find and produce signals" to producers. Taxes create false price signals. Taxes on labor reduce the demand for labor. And by reducing the return to labor, taxes reduce the supply of labor. Ditto savings and investment.

The America of the 1980s and 2000s is not the America of the 1930s and 1950s. The politics of envy and class division do not work as well as they used to. Today more than 50 percent of households own shares of stock directly. Sixty percent of adults own stock directly in mutual funds, IRAs, and 40l(k)s.

In the old days, Democrat leader Gephardt could say, "I am going to tax the rich and the big corporations and give everyone in the room a dollar." Then only a few shareholders--in 1980 it was less than 20 percent of households--owned stock directly, and they would cringe and hope they didn't get hit too hard. Everyone else was tempted to say "Hey this is great. I get a dollar. Let's play this game again."

Now, however, 60 percent of the folks in the room are likely to say, "Hey that is my retirement savings you are looting." Taxes on businesses are taxes on my 40l(k).

The 2003 tax cut dropped the capital gains rate from 20 percent to 15 percent and reduced the double taxation of corporate dividends from 38.5 percent to 15 percent. The stock market value increased from $9.1 trillion in 2002 to $12.7 trillion by the end of 2006. Total shareholder wealth in America increased $6.2 trillion dollars (shareholder wealth includes both major stocks as well as bonds, smaller stocks, etc.). Try and explain to millions of Americans with mutual funds that they would be better off if their wealth had not increased. They are supposed to worry more that Ted Kennedy's larger portfolio also went up?

In the 1950s it was considered by too many acceptable for the state to discriminate against gays and African Americans. Now it is not. Back in those bad old days it was considered politically acceptable to target "the rich" and treat them differently than others. We are slowly moving away from tolerating discrimination based on economics just as we now reject discrimination based on race or sexual orientation. The drive for a single-rate, flat-rate income tax is the moral equivalent of the 1960s civil rights movement which rejected different laws for whites and blacks. Everyone should be equal before the law. The state must treat us without discrimination.

South Africa was a bad place when they discriminated by race. East Germany was not an improvement with its discrimination by economic class. Soviet Socialism targeting landowners/Kulaks and National Socialism targeting Jews and Gypsies were both wrong. Idi Amin went after the Asians; both a race and merchant class in Uganda.

George Wallace and Strom Thurmond recanted. Someday those who would promote hatred and discrimination based on income, wealth, or property ownership will do so also. We are making progress but it does discomfort those who were so used to their prejudices being recognized in law.

As the ownership society grows and deepens ... we are all Kulaks now.

Grover G. Norquist

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