JONATHAN CHAIT JULY 21, 2011
Here's something I did not expect at all: supply-siders appear at least open to supporting the Gang of Six budget. Larry Kudlow offers a qualified endorsement as does the Wall Street Journal editorial page:
[T]he outline from the three Republicans (including Oklahoma conservative Tom Coburn) and three Democrats is different from most other such offers because it combines spending cuts with reform that would lower tax rates. Most Beltway budget deals combine immediate tax increases with the promise of future spending cuts that somehow never occur. They enhance Washington's claim on the nation's private resources. This deal has promise because it would reduce that claim.
That's especially true of the tax reform outline, which suggests moving to no more than three income tax rates, with a top rate in a range between 23% and 29%. This would be "paid for" by closing loopholes and tax preferences, but a marginal rate tax reduction of that magnitude would be worth giving up a lot. It could be by far the most pro-growth tax change since the 1980s, and the U.S. needs faster economic growth now above all else....
Certain high-profile tax breaks, such as the mortgage and charitable deduction and for health care and retirement, would also be "reformed, not eliminated." Our hope would be that the tax writers could duplicate the sweeping 1986 tax reforms that closed scores of tax deductions while slashing personal tax rates to 15% and 28%.
The weird thing is that I like the Gang of Six plan, too. If The Journal editorial page (and Kudlow) and I both like the same fiscal program, chances are one of us is confused. I suspect, unsurprisingly, that the confused party is the supply-siders. The only way to get tax rates down to the levels they're talking about while raising the kind of revenue the Gang of Six is talking about is to eliminate the capital gains tax preference. I have a hard time seeing supply-siders go for that.
The 1986 Tax Reform Act did eliminate the capital gains tax preference, though successive presidents snuck it back into the tax code and progressively enlarged it. Right-wingers tend to completely ignore this fact, which complicates their story of Ronald Reagan as a unwavering supply-side champion. The entire thrust of conservative tax policy since 1986 has been to enlarge the capital gains preference and move away from the clean, broad-based income tax vision of 1986.
On the other hand, maybe they're not confused. Maybe they just fear the alternative scenario in which President Obama wins reelection and the Bush tax cuts expire more than they fear losing the capital gains tax break. The strange alliance does provide a slight glimmer of possibility.