JONATHAN CHAIT MAY 5, 2010
Yesterday Chuck Grassley threw cold water on the idea of a bank tax to repay the financial bailout. His logic was, on its face, puzzling:
"Any money raised from the TARP tax would have to be used to pay down the deficit. If a TARP tax is imposed and the money is simply spent, that doesn't repay taxpayers one cent for TARP losses. It's just more tax-and-spend big government, while taxpayers foot the bill for Washington's out-of-control spending."
Ezra Klein puzzles over what Grassley was saying. Let me translate. In the Republican view, tax cuts do not increase deficits, because they either 1) produce enough growth to increase revenue, or 2) reduce revenue and thus "starve the beast" of spending, or, somehow, both. A corollary holds that tax hikes do not reduce deficits, because they either 3) decrease economic growth and thus decrease revenue, or because 4) the added revenue will cause the government to spend more money. Grassley was expressing idea #4.
This is how discussions of tax revenue that involves any Republican or almost any member of the conservative movement has gone over the last two decades. The discussion is completely detached from reality. All four elements of the Republican tax catechism have been utterly destroyed by empirical reality. It may be theoretically possible for tax rates to be high enough that tax cuts could produce higher revenue, but we're nowhere close to that point. Nor is there any evidence that a lack of revenue will cause the government to stop spending money. (Look around.) Indeed, evidence points in the opposite direction, with rising revenues correlating with falling expenditures, and falling revenues with rising expenditures.
Nonetheless, this has been the state of Republican thinking on taxes since 1990. Supply-side economics gained a foothold within the GOP in the late 1970s, and reached its glory in 1981. But moderate Reaganites realized that supply-side economics had created massive deficits and enormous tax inequities, and clawed back the effects of their policies by enacting tax hikes in 1982 and 1983 and a progressive tax reform in 1986. In 1990, George H.W. Bush clawed back the supply-side revolution a bit more by agreeing to a small tax hike as part of a major deficit reduction package. Conservatives, led by Newt Gingrich, revolted, and vowed never to permit such heresy again. The moderates were banished, and anti-tax absolutism became the sole permissable point of view. Republican candidates for office henceforth had to sign anti-tax pledges (not, however, anti-spending pledges.) In the last presidential election, every major Republican presidential contender asserted that George . Bush's tax cuts had caused revenue to rise. Every major conservative opinion outlet backed this line. (In 2007, libertarian Megan McArdle had a right-wing book review spiked because it asserted that the Laffer Curve did not apply to current U.S. tax rates.)
This is a long way of saying that Kevin Williamson's recent National Review article criticizing supply-side economics is a very big deal. It's not quite a full frontal attack on supply-side economics, more of a lament that the dogma has been stretched in ways that even its founders would find extreme. It resembles Kruschev's "secret speech" (subsequently made public) denouncing Stalin's cult of personality more than actual Perestroika. Still, the article makes plain the clear fact that, at the very least, supply-side economics has been a total failure from the conservative point of view:
Tax cuts aren’t really the problem. The hot action is on the spending side of the ledger, and nobody wants to touch it. The problem with magical supply-siderism is that it gives Republicans a rhetorical and intellectual framework in which to ignore spending — just keep cutting taxes, the argument goes, and somebody else will eventually have to cut spending. The results speak for themselves: Tom DeLay and Dennis Hastert and Trent Lott and Bill Frist all know how to count, but, under their leadership, Republicans spent all the money the country had and then some. Deficits boomed, and Republicans’ claim to being the responsible britches-wearing adults when it comes to spending got unpantsed. Cutting taxes is easy. Cutting spending is hard. ...
So, what should conservatives do? One, abjure magical thinking about tax cuts. Two, develop a rhetoric in which “spending” and “taxes” are synonyms, so a federal budget with $1 trillion in new spending means $1 trillion in new taxes — levies on Americans today or on our children tomorrow, with interest. Three, get a load of those tea-party yokels, with their funny hats and dysgraphic signage, and keep this in mind: They are opposed to the Democrats, but what they are really looking for is an alternative to the establishment Republicans, whom they distrust, with good reason, when it comes to the bottom-line question of balancing the budget and getting our fiscal affairs in good order. And then, finally, decide which angry mob you want to face: today’s voters or tomorrow’s bondholders.
It's a simple accounting identity that the size of government is measured by the size of spending. Reducing tax revenues while leaving spending untouched does not reduce the size of government, it merely defers the payment. Yet, as Williamson suggests, the Republican Party has ignored this fact, treating taxes rather than spending as the measure of government's size.
Obviously, I don't share the conservative movement's goals. The trouble with the right's embrace of magical thinking is that it makes even negotiation over the size of government impossible. In a rational world, Democrats and Republicans should be able to define their desired level of taxes and spending and meet somewhere in the middle. But this negotiation is impossible as long as Republicans continue to be so detached from fiscal reality that they can't even advance their own interests.
Anti-tax absolutists still have a firm firm grip upon the Republican Party and the conservative movement. They have spent a good thirty years drumming magical thinking on taxes into the skull of every dittohead, Young Republican, Fox News watcher, or admirer of Ronald Reagan or George W. Bush. It will take a long, long time before the party is ready again to enter have a discussion of fiscal policy that merely engages with reality. But Williamson's article is a pretty remarkable first step.