why tax cuts are no longer popular

In Bloomberg, Megan McArdle recently argued that tax cuts are no longer good politics for Republicans. She asserts that pro-growth politicians have painted themselves into a corner. This happened incrementally over decades. In order to sell each particular tax cut to the voter-rich middle-class, conservative legislators sweetened each pot by cutting their tax rates more than the tax rates of the rich. Because this has been done for each tax cut iteration, the overall effect has been to evolve the tax code towards a progressive direction over time. In the end, the tax cutters had undercut their own message by solving the tax problems of the middle class. As a result, the tax issue no longer resonates today with them.

To counter McArdle, I suspect pro-growth economists will argue that tax cuts are nevertheless still effective at stimulating economic growth, which brings prosperity to all. For this reason, tax cuts are still in the long-term interest of the middle-class even if they only directly affect the rich. They can point out that the tax rates of the rich have a much bigger impact on the economy than the tax rates for everybody else. This is because a larger percentage of their income is directed towards productive investment. The more this income stream is taxed away, the less money there is available for capital investment. In contrast, poor people invest very little. If they are taxed more, they will definitely feel the pain more acutely. But because they have no choice but to carry on as best they can no matter what, the overall effect of their tax burden for the economy-at-large will be small. Perversely, this means that the economic benefits of tax cuts have increased because the US tax code has become less hated.

So who is right, McArdle or the Club for Growth economists?

I argue that both are. This is because McArdle is talking about political policy, while the economists are discussing public policy. One is about winning elections; the other is about the economy. Unfortunately, there is no law of nature that requires good policies to also be good politically. Beneficial economic policies can repel voters as much as attract them.

The challenge for the conservative political strategist is to devise a way of winning elections while at the same time enacting good policy. I don’t think that this is an insoluble problem. In fact, I don’t think it is even a particularly difficult problem. The first step is to recognize the distinction.

McArdle posits a good suggestion on how to square the circle:

“Republicans may well be able to have tax cuts as an add-on to other things that actually promise benefits to that vast middle swathe of voters. But it can’t be the entrée, much less the whole meal.”

I think this is right. You must package tax cuts with a larger package of policies that are both consistent with free-market principles and widely popular at the same time. These are not hard to find. One would be a crackdown on crony capitalism, the system whereby businessmen connected to the government game the system. This is a good way of demonstrating that you are pro-free market rather than pro-business. (Of course, K-Street lobbyists won’t like this but hey, ask John Boehner what K-Street did for him lately.) Another would be to emphasize the importance of work and savings on economic success. The Protestant work ethic has long been appreciated in our culture and its champions are always welcome. Of course, going after the freeloaders on welfare is also both good politics and policy (particularly if you make sure to emphasize how similar they are morally to the Wall Street freeloaders). And this is just what I came up with on the spur of the moment. There is much more.

As an aside, one of the few mistakes in McArdle’s article is to lump deregulation in with tax cuts. The politics of overregulation are completely different. While it has been true that the deregulation issue has been very poorly sold by the Stupid Party, I don’t see any reason why this needs to continue. I think there are plenty of ways to sell deregulation. For instance, how about: deregulation = freedom. But that is a topic for another post

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Comments

[monkey]

Interesting take, certainly here in Canada tax cuts have lost their appeal although I think the main thing that drove to begin with as our tax rates were uncompetitive driving away talent and business whereas today that is less the case (although Trudeau's tax hike on the rich and the same at the provincial level, could create another brain drain). Also I think the whole income inequality thing has unfortunately worked amongst many as many people are naturally envious of those who are more successful so it's good politics but bad policy to attack the rich and big corporations.

In the US though I think it comes more to turnout and a handful of swing states as unlike Canada there are far fewer swing voters and the country as a whole is very polarized so get out the vote is more important there whereas here it is more about winning the battle of ideas which the left has unfortunately been quite successful at in the past few years but with mostly left leaning governments coast to coast that could change as people see their policies aren't as good as advertised.

[old white guy]

monkey, it has been my experience that Canadians have never met a tax hike that would not pay. old white guy.