“Taxes are what we pay for civilized society.”
-Oliver Wendell Holmes Jr., former US Supreme Court Justice
We have become a nation of fetishists. We regard our cell phones as if they were pagan oracles. We stuff entire foot-lockers with firearms. We fret over matching shams, duvets and pillow covers. Legions of adults seem to believe that comic-book superheroes are real. There is, I am told, a biography of Abraham Lincoln’s barber. Historians will one day conclude the early 21st century was an okay time to be a human but a very good time to be a dog, particularly one small enough to fit comfortably on the glass display cases at Neiman Marcus.
And in Washington, our two ruling tribes are indulging their countervailing obsessions with taxes.
We at Anfield believe strongly in the need for tax reform. (Though we weren’t all that happy about the furtive way in which the Republican plan was drafted, which may be good for lobbyists but bad for the Republic.) The corporate tax code is hideously complicated and our businesses are assessed at a level well above the OEDC average. Tax reform and reduction is vital for US competitiveness and we’re hoping Congress will ink a deal before the year ends.
Nevertheless, we consider Promontory as an open forum – a little of Hyde Park’s Speakers’ Corner along the California strand, if you will – and in that spirit we are devoting this month’s edition to an opposing view on the issue of tax, one that rejects an enduring correlation between lower taxes and economic growth. We will then present our own side of the debate in December.
The counter supply-side argument begins with a simple, empirical fact: Congress has been cutting taxes for the last half-century and current growth rates are a shadow of what they were in the 1950s. The economy grew by a cumulative 2.6% under the reductions led by President George W. Bush from June 2001 to 2007, well below the 3.7% growth that prevailed during the Clinton administration which raised taxes. When those cuts expired, GDP continued to grow at a moderate rate. On the state level, Kansas Gov. Sam Brownback famously slashed taxes as “a shot of adrenaline” in the heart of the economy and the state now lags the national average in economic, employment and small-business growth.
Tax reduction coincided with strong growth during the Reagan era but, as The Financial Times recently pointed out, that association is conditional; back then productivity growth was strong, the federal debt was less than a quarter of the economy and women were entering the workforce at an aggressive rate. Today, debt is more than three-quarters of GDP and productivity is flat-lining.
Corporate advocates, like the Business Roundtable and the US Chamber of Commerce, claim that once business-owners’ tax burden is lightened they will repatriate a $2.6 trillion cash slurry they’re keeping overseas and invest it in the brick-and-mortar economy back home. But if history is any guide, that loot will most likely be divided among shareholders who, to be fair, drive corporate performance with their investments. On the other hand, what better time to finance new enterprises and infrastructure than right now, with liquidity roaring through the markets like a cataract? As it happens, corporates are already gorged on debt – not as leverage for the real economy but for M&A and other forms of financial intercourse.
It is worth remembering that Reagan’s own budget director pointedly debunked supply-size economics and Reagan himself repealed much of his tax cuts after they dramatically increased the budget deficit. His successors indicate no such restraint. The refreshingly wonky Urban-Brookings Tax Policy Center estimates that under a tax plan consistent with the Republican bill, federal revenues would fall by at least $7.0 trillion over the first decade and by at least $20.7 trillion by 2036. It appears Congress has no intention of offsetting those shortfalls by raising revenue elsewhere.
Having presided over record deficits during much of the Obama years, Democrats are in no position to lecture Republicans about fiscal responsibility. Regardless of which party is calling the kettle black, debt service crowds out investment in such productive activities as public works.
This is the problem with the majority party’s unnatural preoccupation with tax-cuts: it converts a means of fiscal policy into an end of itself. Instead, why not build a vision for tax reform on issues of broad concern, such as code complexity or revenue neutrality – particularly the latter, now that both parties are concerned about ballooning indebtedness? Or how about subsidies? As it stands, a quarter of all federal sweet-heart deals for various industries and special interests are provided for through the tax code, be they for employer-provided insurance, home sales, oil production or agriculture.
Even if these programs are worth preserving, Congress has an obligation to explain why. As the TPC’s C. Eugene Steuerle recently wrote for Forbes, “To the extent that these subsidies should be maintained they should be made more explicit and more cost effective.”
Therein lies the difference between fetishism and public policy.