Issue #20, Spring 2011

The Triumph of Taxophobia

To read the other essays in the “First Principles: Arguing the Economy” symposium, click here.

The conservative movement’s embrace of taxophobia is probably the most important development in American political life over the last three decades. It is the one quality that most distinguishes American conservative elites from conservative elites in other countries. They’re more likely to question climate science, more sanguine about people dying for lack of health insurance, and less xenophobic (which is rather nice). But above all—far above all—they hate taxes.

Taxophobia has spawned an epistemology of its own and has completely reshaped the landscape of American politics. It more than anything else has driven the widely decried rise in partisan conflict. More profoundly, conservative taxophobia has redefined the terms of the political debate. Two generations ago, economic liberalism meant Keynesian deficit spending and a rapidly expanding welfare state with little concern for deficits. Fiscal conservatism meant opposition to deficits and inflation. Today, the old fiscal conservatism has been embraced by the mainstream of the Democratic Party. The old fiscal liberalism has been confined to the margins, espoused by left-wing dissidents to the Democratic mainstream. And the Republican Party inhabits an otherworldly new realm that even the staunchest right-wingers of a generation before could scarcely have imagined. As the two parties trade power back and forth, the ideological basis for economic policy pingpongs between the old right and a loopy kind of far-right. Periods of Republican governance have grown increasingly disastrous, while periods of Democratic governance are largely consumed with staving off fiscal collapse.

How did this happen? All conservatives, and many liberals, explain this transformation as the story of the rise of a new idea. But I don’t think that’s right. As I will explain, ideas only serve to rationalize political and economic self-interest. However, the story does begin with a new idea.

The Birth of a Notion

In the mid-1970s, the new doctrine of supply-side economics suddenly emerged on the right. The doctrine took what had been a marginal notion within the economics profession—the idea that higher tax rates can dampen the incentive to work and innovate—and elevated it to something close to a religion. The supply-side creed held that tax rates, especially on the rich, had enormous effects on economic growth. It was even possible, the supply-siders famously promised, that tax cuts could unleash so much economic growth that the net effect would increase tax revenue.

Jude Wanniski, a Wall Street Journal editorial writer who did more than anybody else to formulate and spread the new doctrine, spoke of the new creed in quasi-religious terms, as did many of his adherents. “It was Jude who introduced me to Jack Kemp, a young congressman and recent convert,” recalled Irving Kristol, who helped spread the gospel of supply-side economics. “It was Jack Kemp who, almost single-handed, converted Ronald Reagan.”

We can identify three phases of supply-side craziness in Republican Party history. In phase one, the Republican establishment greeted supply-side economics with incredulity. The messianism and insouciant disregard for sound fiscal principles sounded more like a nutty left-wing scheme than anything a Dwight Eisenhower or even a Barry Goldwater might recognize. George H.W. Bush called it “voodoo economics.” A great blaze of tax cutting at the outset of the Reagan presidency quickly produced massive deficits, and the Reagan Administration—still dominated by an older generation of Republicans—quickly retrenched. It quietly raised taxes in 1982 and 1983, and then in 1986—aghast at the massive corporate tax loopholes that had grown out of its initial tax cuts—agreed to a tax reform that, even in the course of lowering nominal rates, shifted a larger share of the tax burden onto the rich by sweeping the tax code of subsidies for the wealthy.

Through the next decade, in phase two, the Republican Party stayed committed to anti-tax absolutism in rhetoric, but it remained largely tethered to fiscal reality in practice. In 1990, George H.W. Bush agreed to a major deficit-reduction package, including substantial spending cuts, in return for a small hike in the top marginal income tax rate, from 28 to 31 percent.

This turned out to be the last gasp of old-fashioned Republican fiscal conservatism. Conservatives in the House, led by Newt Gingrich, revolted, and Republicans wound up opposing their own president’s budget deal by a 163-10 margin (it passed thanks to overwhelming Democratic support). They called the deal “the fiscal equivalent of Yalta.” Bush was a traitor; his budget director, Richard Darman, became “the party’s untouchable,” as one reporter later put it. Conservatives decided never to allow such heresy again, and indeed they never have.

Which brings us to phase three. Over the last 20 years, the penetration of taxophobia within the Republican Party has been total. Reducing taxes, especially taxes on the rich, has been enshrined as the party’s unquestioned central policy goal. Virtually all Republicans at the national level have signed a pledge concocted by anti-tax fanatic Grover Norquist pledging never, under any circumstances, to support higher taxes. No such pledge exists for spending.

In 1996, Bob Dole, who had once spoken contemptuously of the supply-siders, picked Kemp himself as his running mate and made a tax cut the centerpiece of his campaign. The George W. Bush Administration poured every ounce of its political capital into reducing taxes, which it did in 2001 and 2003. In 2008, every Republican presidential candidate asserted (wrongly) that the Bush tax cuts increased tax revenue. Upon taking control of the House this year, Republicans immediately dismantled a rule, first imposed as part of the 1990 deficit deal, requiring that any entitlement increase or tax cut be matched by tax hikes or entitlement cuts. The rule had been effective at restraining spending—but it got in the way of tax cuts.

Discredited, but Immortal

All this pertinacious devotion, despite the plain fact that there are very few ideas that have failed as unequivocally as supply-side economics has failed. Supply-siders like writer George Gilder predicted that Reagan’s tax cut would “generate enough new revenue to eliminate the deficit or reduce it to manageable size.” This proved staggeringly wrong, and, as noted above, the Reagan Administration recognized the wrongness almost immediately. In 1993, supply-siders (including virtually the whole Republican Party) predicted that President Clinton’s tax hike on the rich would induce a recession and cause revenue to decline. Instead, the economy boomed and revenue exploded.

When Bush cut taxes in 2001, supply-siders insisted that revenue would fall much less than conventional economists predicted. Harvard economist and occasional Republican adviser Martin Feldstein argued, “The true cost of reducing the tax rates is likely to be substantially smaller than the costs projected in the official estimates.” Conservative talking head and also occasional Republican adviser Lawrence Kudlow predicted, “Future surpluses will rise, not fall.” In fact, tax revenues collapsed. Moreover, the economy’s performance since Bush cut taxes has ranged from disappointing to disastrous, an outcome that has once again undermined the supply-side belief that low tax rates hold the key to economic growth.

And yet, as three decades of economic and budgetary data have repudiated supply-side belief time and again, its hold on the Republican Party has only strengthened. Robert Bartley, the late Wall Street Journal editorial page editor and fervent supply-side champion, once wrote, “Economists still ridicule the Laffer Curve, but policymakers pay it careful heed.” He meant this as a boast. Political support for supply-side economics appears completely impervious to data. If it were a person, it would be Bill Murray in Groundhog Day. “I have been stabbed, shot, poisoned, frozen, hung, electrocuted, and burned,” he boasted, “and every morning I wake up without a scratch on me, not a dent in the fender. I am an immortal.”

Moral Disgust at Redistribution

As you may have surmised, the political success of taxophobia has little to do with the intellectual merits of the supply-side idea. One clue about the marginal role of the idea is that, from the very outset, advocates of supply-side policies relied on a second rationale that is not only different from the logic of supply-side economics but mutually exclusive. This argument is known as “starve the beast.”

Unlike supply-side economics, starve the beast concedes that tax cuts reduce revenue, but insists that the reduction of revenue automatically produces a decrease in expenditures. Reagan offered this argument himself in a 1981 budget address. “[T]here were always those who told us that taxes couldn’t be cut until spending was reduced,” he asserted. “Well, you know, we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance by simply reducing their allowance.” In 2001, coming off the longest economic expansion in American history, Republicans soft-pedaled supply-side claims about reducing the disincentive to growth, and relied more heavily on “starve the beast” justifications for tax-cutting. George W. Bush and other Republicans insisted repeatedly that, if the budget surplus were not dissipated as tax cuts, “it would get spent,” as if automatically.

Starve the beast is not an economic doctrine, or even a pseudo-economic doctrine, but merely an aphorism. Unlike supply-side economics, conservatives did not invest vast sums into legitimizing starve the beast as an actual theory. Those studies that have attempted to evaluate it have instead proven the opposite: Lower revenues have resulted in higher, not lower, spending. That result, of course, is easy to see with the naked eye. The tax hikes of 1990 and 1993 inaugurated a period of generalized fiscal restraint, in which revenue climbed and expenditure fell. The George W. Bush era smashed through the bulwarks of fiscal restraint established by the previous two presidents, resulting in falling tax revenue and dramatically higher spending.

Starve the beast failed in ways that even its proponents concede. Supply-siders still try to explain away Reagan’s deficits, the Clinton boom, and the Bush bust. Yet nobody even bothers to deny the failure of Bush’s starve-the-beast policies. Hardly a day goes by without conservatives lamenting that failure. The Bush Administration began with Republicans arguing that tax cuts were needed to prevent an explosion of spending. It ended with Republicans lamenting an explosion of spending, but vowing to maintain the policies whose stated rationale was to prevent that spending explosion.

When you see a party shifting between two mutually exclusive arguments for a policy, each of which fails spectacularly and repeatedly, you have to look for other reasons behind the policy other than the stated rationale.

One such rationale for supply-side’s pioneers was simple self-interest. In abandoning its traditional fiscal conservatism for tax-cutting, the GOP could now be offering goodies to voters rather than taking them away. Irving Kristol, who published Wanniski’s most influential essay in The Public Interest, later admitted in a memoir, “political effectiveness was the priority, not the accounting deficiencies of government.”

Yet political opportunism, too, only goes so far as an explanation. While people like tax cuts, they like other deficit-increasing policies—especially higher Social Security and Medicare benefits—even more. After leaving the Bush Administration, disgruntled Treasury Secretary Paul O’Neill published his assigned talking points for the 2001 tax-cut debate. One frankly conceded, “The public prefers spending on things like health care and education over cutting taxes. It’s crucial that your remarks make clear that there is no trade-off here.” Moreover, tax cuts for the rich tend to lack public support altogether. If mere vote-chasing were all that lay behind Republican tax-cut mania, you’d expect the party to embrace more broad-based tax cuts, as opposed to the sharply regressive tax cuts that lavish a majority of the benefit upon a small fraction of the populace.

There is one idea that explains Republican behavior: moral disgust at income redistribution. Since it doesn’t poll well, this is not an idea that you often find expressed in talking points or in other means of public persuasion. But occasionally this sentiment pops up in the form of a kind of raw royalism, usually from conservatives who don’t have to run for office. Former Bush economist Greg Mankiw endorses the belief that free markets are a flawless arbiter of income distribution. Republicans, he writes, believe that “in a free society, people make money when they produce goods and services that others value, and that, as a result, what they earn is rightfully theirs.” Adds American Enterprise Institute President Arthur Brooks, “[I]t is a moral issue to confiscate more income from the minority simply because the government can.”

When Republican elected officials pay fealty to these ideas, it is usually through oblique references. They often bemoan the fact that nearly half of all taxpayers pay no income tax (which ignores the burdens of federal payroll taxes) or that the top 1 percent is paying a rising share of the tax burden (which is true, but only because the top 1 percent is earning a higher share of the income). The underlying sentiment is that the practice of levying higher tax rates upon the rich amounts to an oppressive form of discrimination—democracy as mob rule. Conservatism’s commitment to flattening the tax code, so inexplicable to those outside the movement, is an inviolable principle within. And the necessity of keeping the core reason secret only adds to its moral urgency—so oppressed are the rich that those who seek to relieve their oppression dare not even speak openly.

This state of affairs helps explain the increasingly bitter partisanship of the American political debate. Opposition to the progressive income tax is at once a sacred and a hidden value for Republicans, and thus one that makes compromise nearly impossible. You cannot bargain with a partner whose stated goals are merely pretexts. A slow economy proves that tax cuts are needed, or a prosperous economy shows that tax cuts are affordable, or tax cuts will reduce the deficit by increasing revenue, or tax cuts will reduce the deficit by starving government of revenue. Vast swaths of public discourse are couched in nonsense.

Issue #20, Spring 2011
 
Post a Comment

Tom Marchioro:

Bravo Jonathan! As good a summary as I've ever seen of the right's group embrace of the Tax-Cut-Tooth-Fairy ideology.

In the late 1970s, as a young man in my twenties, I almost switched parties and became a Republican. By the mid-80s I was no longer tempted, and by '94 they disgusted me. Now? Now it's like viewing some bizarre form of life from another planet. You end up wondering how something so strange can even exist.

Mar 16, 2011, 2:57 PM
JP Bouffard:

The number of categorical statements in this piece which are either outright incorrect or debatable is through the roof. Federal revenue DID increase when marginal tax rates were lowered under the Reagan administration. There IS validity to the Laffer curve. Having said that....I agree substantially with Chait's point that the Republican party has turned the concept of "fiscal conservatism" into a joke, a caraciture. If one believes in the general principle of the Laffer curve (which must be valid....if the government confiscates all wealth, citizens would starve and there would be zero economic activity, and if tax rates are zero, there would be zero revenue, so in between must like an optimum taxation rate), one must be intellectually honest and admit that small increases in taxation rates will not kill the economy. I am a republican and a fiscal conservative, but was very disappointed that President Obama did not fight the extension of GW Bush tax rates.

Mar 16, 2011, 4:51 PM
BAL:

For JP B:
References for Reagan tax cuts increasing revenue? Even his Director of OMB Stockman called BS. See "The Education of David Stockman", Atlantic Monthly, Dec 1981. The idea of optimum tax rate is not at issue. The question was whether lowering tax rates at that time would increase revenue. It is crystal clear that it decreased revenue. No other 1st world democracy has fallen victim to this religious obsession with cutting taxes. "I like to pay taxes," said Oliver Wendell Holmes. "With them I buy civilization."

Mar 16, 2011, 8:22 PM
VL:

hm... i'd say that taxophobia would be the opposite of ataxophobia, a psychiatric term for a fear of disorder. so taxophobia would be a fear of order. did you intend this double entendre?

Mar 17, 2011, 2:31 AM
jamie_2002:

JF:
Suppose your fear is realized and the government "confiscates" all the wealth?

What happens to the wealth after it is "confiscated"? Is it all spent by the department of waste fraud and abuse?

Mar 17, 2011, 12:30 PM
Lazarus:

Thank you. You might also have mentioned that the tax cutting and flat tax ideas were tried out 150 years ago, in 1861, in the Confederacy. There, as a century-and-a-half later, they proved a total economic and fiscal disaster.

Mar 17, 2011, 10:08 PM
jms:

Republicans, he writes, believe that “in a free society, people make money when they produce goods and services that others value, and that, as a result, what they earn is rightfully theirs.”

It was not so long ago that Democrats believed this as well, while only Socialists and Communists believed in the effective abolition of private property. Apparently, the idea that some people have the right to use government force to help themselves to other people's property has gone so mainstream with liberals that it has to be explained to them that there are some people -- a strange bunch called conservatives -- who believe the opposite.

Mar 17, 2011, 10:35 PM
Robert H:

"There is one idea that explains Republican behavior: moral disgust at income redistribution."
===

But why? The writer never gets around to explaining it. Why does the very idea that someone might undeservedly get a few welfare dollars drive Americans so nuts? This is something that affects far more than just Republicans. It affects most of us to the point that we are blind to the real looting the takes place at the hands of the very wealthy.

Mar 18, 2011, 8:45 AM
Jude:

If you want a saltier version of the same point, I humbly submit this.

Mar 18, 2011, 10:40 AM
Tom M:

JP Bouffard, you should look more closely. Federal revenue did indeed go up after Reagan cut tax rates in 1981. Not because of the rate cuts but because (this is key so read closely) he raised taxes at least 6 times.
The Greenspan Social Security fix imposed a substantial tax on all incomes. The 1986 tax fix raised rates on formerly sheltered income and put companies like Integrated Resources and Cardinal Industries in bankruptcy.
Federal revenue went up for the simple reason that when Reagan cut rates, he caused massive deficits and to claw some of that back, he raised taxes.
It's a simple explanation as opposed to the Laffer curve which is a stupid explanation.

Mar 18, 2011, 11:16 AM
Bart:

What about tax cuts for the wealthy being a kind circulatory system for the GOP?

A quid pro quo is that a portion of the cuts will be recycled back to Republicans in the form of campaign contributions.

Mar 18, 2011, 11:51 AM
St Dalman:

JMS - read the sentence before. The "belief that free markets are a flawless arbiter of income distribution." is flawed as hell. There's absolutely no reason to believe that an investment banker does work that's worth a few million dollars a year while a construction worker gofer gets a low hourly wage. The banker's earnings are massively inflated by the system - wealth and power beget more wealth and power. The truth is, the free market and privatization CONCENTRATE wealth, not reward people in appropriate amounts for the work they do.,

Apparently, the idea that the powerful and wealthy have the right to use force to help themselves to other people's property (because private market coercion is SO much better than government coercion, right?) has gone so mainstream with conservatives, that it has to be explained to them that they're being robbed.

Just as the people (via elections) are a check on government power, the government is an excellent check on the power of the wealthy.

Mar 18, 2011, 5:19 PM
Joe:

Neoliberalism. Google it.

Apr 18, 2011, 9:34 PM
Dave:

Can anyone recommend a good book that examines real data regarding whether supply-side economics is "voodoo" or not? Have been looking and suprised to not be able to find yet. Thank you!

Apr 20, 2011, 8:36 AM
Paco:

The definition of supply side economics - the idea that higher tax rates can dampen the incentive to work and innovate - turns me into something I find surprising. I had never thought of myself as a supply-sider.

I do think that taxes can sometimes dampen the economy but I don't think anyone alive has ever seen such conditions in this country.

In third-world countries, lack of capital can be a severe restriction on starting a new business - just witness the great success that micro-loans have had. It is just possible in these third world countries (where only the poor pay taxes) that a tax cut could be a significant stimulus to innovation and economic growth.

The U.S. economy has not had this problem for a very long time if it ever has. However, conservative economic policies may succeed in bringing such conditions about.

May 11, 2011, 9:59 AM
Danny Steinberg:

It's amazing that someone with such great quotes from conservatives about the free market can be so stupid regarding the affect of taxes/regulation on the economy. Of course taxes damper the economy, economic logic backs that up.

May 28, 2011, 8:57 PM
Stephen Smith :

I'm honestly not concerned with supply side versus starve the beast principles as I am concerned about keeping the money I make and choosing for myself where it's spent or whether I choose to save it!

Feb 13, 2013, 12:25 PM

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