Economics, Pethokoukis, U.S. Economy

A reply to the Wall Street Journal’s Kim Strassel on taxes and reform conservatism

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The Wall Street Journal’s Kim Strassel offers this critique of reform conservatives and the policy agenda outlined in the new (free and downloadable book) “Room to Grow.” This about sums it up:

Mr. Brat’s victory is surely awkward for a new wing of the conservative movement that has taken to arguing that the whole free-market, supply-side, Reaganesque agenda is passé. Humbly declaring themselves the “reform” conservative moment, this group has  …  some interesting ideas, all overshadowed by the book’s central premise: That conservatives need to embrace government to better endear themselves to the “middle class.”

The authors are clear that politics, not principle, needs to drive conservative policy. Nowhere is that clearer than in the chapter by former Bush Treasury official Robert Stein on tax policy. A summary: Marginal tax rates are no longer popular because they don’t give much to the middle class. Republicans instead need to embrace redistribution and lard the tax code with special, conservative-approved handouts for said middle class—namely a giant tax credit for children, similar to that proposed by Utah Sen. Mike Lee.

… Absent from the chapter is any recognition of why Reagan, and the party, embraced tax cuts. It’s this thing called “economics.” Cutting taxes on capital—and cutting high marginal rates—spurs investment, which grows the economy, which benefits everyone, including the middle class. The good politics follows. The middle-class beneficiaries of Reagan’s economic boom showed their own appreciation by signing up for a conservative political realignment that lasted decades.

As someone who contributed to “Room to Grow,” (and someone who considers himself a fan of Strassel’s work) that’s not how I see things.

1.) The book’s central premise is that conservative economic policy should address today’s economic challenges, not yesterday’s. And those problems extend beyond tax policy. Robert Novak’s famous axiom, “God put the Republican Party on earth to cut taxes. If they don’t do that, they have no useful function,” is incomplete in a nation where (a) health care costs are rising faster than income and gobbling up wages, (b) the nation’s $600 billion in annual K-12 spending is failing to prepare students for the modern job market, (c) family life in middle-class America is growing increasingly fragile. At the same time, the job market is becoming steadily more bifurcated due to automation and globalization. Some economists fear a permanently split labor force with rising pay for a slice of tech-savvy workers, and stagnant wages for everyone else. I mean, anyway you slice it, this is not a good chart for middle-class America:

Sentier Research

Sentier Research

 

2.) Do reform conservatives argue against free-market economics? Strassel surely must know better. My bit, instance, focuses on how all manner of government interference into markets — from the “too big to fail” bank backstop to overly strict patent and copyright law among other things — has steadily reduced the US economy’s competitive intensity and business dynamism. In short, the private sector needs a lot more Schumpeterian creative destruction — and a lot less cronyism — to create good-paying jobs. And the chapters on education and health care reform center on how choice and competition can improve value and productivity in those key sectors.

3.) The core of Strassel’s argument revolves around the reform conservative approach to taxes. A few facts to keep in mind: When Ronald Reagan took office, the top marginal rate was 70% and inflation-driven “bracket creep” (consumer prices rose by more than 8% a year from 1973 through 1981) pushed middle-class wages and salaries into higher and higher tax brackets. Today, by contrast, the top rate is 40%, tax brackets are annually adjusted for inflation (which has averaged only 1.6% the past five years), and 43% of American’s pay no federal income tax (although two-thirds of those folks pay payroll taxes.)

4.) So what sort of tax reform do the above facts suggest? Well, the “Room to Grow” tax plan would, effectively, expand the child tax credit (including letting it apply to both income and payroll taxes). A married couple with two children earning $70,000 would get a tax cut of roughly $5,000 per year vs. current law. Unlike Strassel, I don’t see howletting parents — the folks who are doing the hard and costly work of creating the workers and investors and innovators and entrepreneurs and safety net-supporting taxpayers of the future — keep more of their income as government redistribution. And if this sort of tax reform creates a less anti-family tax code that helps families have the number of kids they prefer, the result could be a younger and more dynamic society. That sounds pro-growth to me.

5.) Of course, tax reform doesn’t have to stop there. Strassel wrongly assumes that since the book doesn’t lay out a comprehensive, soup-to-nuts tax plan, reform conservatives don’t care about investment or business or economic growth. Actually, reform conservatives have written quite a bit about moving to a consumption tax. As Ryan Ellis explain on his Facebook page:

 … a key element of reform conservatism’s tax policy has been moving toward a consumption base while lowering business tax rates for competitiveness. The point they have made on rates is that cutting the top personal rate from its current level is simply not the highest pro-growth tax reform priority. Yes, it cuts rates on flow-through firms. But much of the “juice” is wasted cutting wages for high income earners, which at current marginal rates doesn’t get you much at all of a Laffer curve effect.”

And my chapter is also about economic growth but tries to compensate for the fact that center-right policymakers have focused too much on tax reform at the expense of all the ways government impedes growth.

As for the politics of all this, well, my primary concern is whether or not “Room to Grow” is smart policy. And I obviously think it is. Creating and promoting good ideas to make America prouder, stronger, and better is what drives me and, I would assume, the rest of the book’s authors.

But I will say this about politics: If the 2016 Republican nominee wants to make his big economic idea cutting corporate taxes at a time when corporate profits are at their highest level in 85 years and worker compensation is at its lowest level in 65 years as a share of national income … well, good luck with that. Not only does that intuitively seem like a losing message — and recent history seems to support that intuition — but there is also this recent survey from Global Strategy Group:

061314gsgFollow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

 

12 thoughts on “A reply to the Wall Street Journal’s Kim Strassel on taxes and reform conservatism

  1. I’m guessing this Global Strategy Group survey is measuring what people BELIEVE will lead to strong economic growth. So you agree that the vague platitude “provide more income opportunity for all” will lead to stronger economic growth than a supply-side tax cut? Or you don’t care because the reality is this is what people believe?

    Here is my evidence for the continued effectiveness of tax cuts – 7.2 percent GDP growth in the quarter after the dreaded “Bush tax cuts” of 2003. Will an expansion of the Child Tax Credit lead to this kind of economic growth?

    • Child tax credit is for other purposes – we have a shortage of children in this country and if we don’t produce enough to replace.folks who retirex- it is highly inflationary since the same amount of dollars will at some point end up chasing fewer goods and services.

      Problem is that the credit is an entirely different issue than general tax cuts. After reading the arguments above – I tend to favor Strassel

      After reading the arguments above. – I tend to favor

    • In reality, there’s no evidence that the “supply-side” tax cuts had any benefit whatsoever for anyone but those whose taxes were cut. (I wish that this comment board were able to take graphical posts, so I could save other readers a lot of work.) Let’s use “growth” as a proxy for “job creation”. Here’s a reference that shows no growth resulting from lowering the top marginal personal income tax rate. The graph seems to show a small decrease in GDP growth as the tax rate is lowered. It covers the whole period of “supply-side economics”.

      http://www.businessinsider.com/correlation-tax-rates-gdp-2012-3

      Here’s a reference that shows the same trend when the tax rate on capital gains is lowered:

      http://www.forbes.com/sites/leonardburman/2012/03/15/capital-gains-tax-rates-and-economic-growth-or-not/

      In this graph, the trend is unambiguous: lowering the tax rate on capital gains lowers the growth rate of GDP. This graph, too, covers the whole period of “supply-side economics”.
      Here’s a graph of the trend in corporate tax rates. I couldn’t find any graph already comparing this with the corresponding GDP growth, but it’s easy to plot a comparison graph from this one and the GDP growth data from one of the other graphs. Again, it appears that lowering the corporate tax rate lowers the GDP growth rate.

      http://ih.advfn.com/news/fiscal-cliff-2013-united-states-fiscal-cliff-impact-on-gdp

      Notice that none of this information comes from the “Huffington Post”, or The Nation, or Mother Jones, or “The Daily Kos”, or “Think Progress”, etc.

      The supposed “stimulus” effect of tax cuts for the rich on “job creation” is evidently pure ideology, with no relation whatsoever to the world in which we actually live. I can’t see how on earth either the common good of the nation or the people responsible for Republican electoral success can benefit by adopting a set of fictions as a starting point. At the very least, anyone who believes the claims made for “supply-side economics” boxes himself into a corner.

      .

  2. “Here is my evidence for the continued effectiveness of tax cuts – 7.2 percent GDP growth in the quarter after the dreaded “Bush tax cuts” of 2003. Will an expansion of the Child Tax Credit lead to this kind of economic growth?”

    No. But that sort of proves the point, when you correlate the stunning “success” of the Bush tax cuts with the above chart, which shows household income stagnant or declining over that exact same period.

    The hard fact is that while tax cut-fueled economic growth might, at one point, have improved things for everyone, including the middle class, that is no longer the case. Those two formerly-linked items – the wealth of the nation and the wealth of the middle class – have been demonstrably decoupled. The deep reluctance of the conservative movement to acknowledge this is a form of intellectual cowardice. It effectively says, “We don’t have any new solutions for this problem, but meanwhile, let’s keep pushing the old solution.”

    Doing that doesn’t only make conservatives seem divorced from reality, it makes voters suspicious of conservative ideas and motives, as the above survey indicates.

  3. I am not unsympathetic to ‘reform conservatives’. I do believe there is a new political AND economic context that requires focusing on some things that Reagan did not have to focus on. Among these are poorly tuned free trade policies; destructive environmental regulation; Obamacare excesses; and a Federal Reserve that punishes savers and trashes the dollar; and an uncontrolled border. So, a few new points of emphasis in prescribing policy do seem warranted. However, I agree with K Strassel–tax cutting shouldn’t be abandoned. Particularly in the area of corporate taxes. We just need to steer the argument away from the goofy 1 percent types.

  4. We need a new understanding of economics which is vital if humanity is to survive in the future. Transfinancial Economics may well be the answer whether we like it, or not. Click on the name above for more info.

  5. Yeah, republicans always win when the talk taxes. The middle class is just hell bent on pushing through those corporate tax cuts.

  6. (a) health care costs are rising faster than income and gobbling up wages,
    (b) the nation’s $600 billion in annual K-12 spending is failing to prepare students for the modern job market,
    (c) family life in middle-class America is growing increasingly fragile.

    In case you didn’t notice, all three are the result of growing government involvement. Fannie, Freddie, & HUDs’ easy credit caused housing prices to skyrocket; Medicare & Medicaid caused medical costs to skyrocket; easy credit for college students caused education costs to skyrocket; and liberal doctrine has corroded our culture, tearing at the fabric of America’s family life.

    Get a clue. Dial government back to the early 1990s, because today’s government is choking & corroding everything we once held dear.

  7. Child tax credit expansion may have an unintended consequence to propagate more fatherless households. Let’s be careful with this policy idea

  8. I will have to read your book to see where “Providing more income opportunity” and “cutting regs on businesses” stand. If its a central premise of your book, then Strassel is wrong – because cutting regs by necessity demands slashing the permanent bureaucracy (look at the EPS and FDA and how they insinuate themselves into every economic activity like a parasite).

    A better argument than even a child tax cut is to create either a flat tax or a fair tax – both of which will allow for the removal of the IRS as an agency of the police state (it won’t eliminate it, but it will eliminate its political function).

    And finally, where does pushing medical R&D come in? I hope that AIE is pushing that advancing medical science as fast as possible (and allowing companies who do this sort of research huge tax incentives if the discoveries reduce medicare costs) should be a component of a future conservative health care initiative.

  9. But I will say this about politics: If the 2016 Republican nominee wants to make his big economic idea cutting corporate taxes at a time when corporate profits are at their highest level in 85 years and worker compensation is at its lowest level in 65 years as a share of national income … well, good luck with that. Not only does that intuitively seem like a losing message — and recent history seems to support that intuition — but there is also this recent survey from Global Strategy Group:

    What a huge (and pleasant) surprise to see this emerge from your keyboard (and head…).

  10. Its hard to take seriously a survey which rates so highly “Increase the Minimum Wage” and “Guarantee All Workers a Living Wage.” Obviously the respondents do not comprehend that minimum wage floors (or living wages) benefit the already employed, to the detriment of those priced out of the labor market, and that paying more a good or service than it is worth (in market terms) is redistribution via a hidden tax. At their most basic effects, such policies subsidize less productive work, distort the labor market, and result in misallocation of human capital.

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