This might sound crazy, but what if we tried cutting taxes for the rich?
A specter is haunting the Republican Party—the specter of Ronald Reagan's tax cuts.
For the last 35 years, the GOP has monomaniacally focused on lowering taxes on the rich. It's one part economic theory, and another party political mythology. The theory is that letting high-earners keep more of their money gives them the incentive to make and invest even more, which creates growth that benefits everybody. And the political mythology is that this is what made Reagan so popular. (Never mind that then-Fed chair Paul Volcker's rate cuts, more than Reagan's tax cuts, led to "Morning in America"). That's why, no matter what the problem, Republicans insist that government is not the solution; tax cuts for the wealthy are.
There's only one hitch: none of this is really true. Sure, incentives matter. But so do other things. Indeed, the economy grew faster after Bill Clinton raised the top rate to 39.6 percent than it did when Reagan cut it to 28 percent. Not only that, but, adjusted for inflation, stagnant median wages the past 25 years show that tax cuts for the rich have not, in fact, trickled down. So it's no surprise that "supply-side economics" hasn't been a political winner since the 1980s. Republicans have lost the popular vote in five of the last six presidential elections, and no, that's not because they haven't promised deep enough tax cuts. Mitt Romney, you might remember, ran on bringing the top marginal rate down to the same sacrosanct level it was when Reagan left office.
It's time, some Republicans think, for the Party to confront the reality that it's not 1980 anymore. For one, there isn't as much bang for the tax-cutting buck when you bring rates from 40 to 25 percent as there was when Reagan brought them from 70 to 28 percent. For another, cutting the federal income tax doesn't help the 40 percent or so of households that don't pay it. And, finally, you can't blithely assume that growth will eventually reach the middle class when it hasn't for decades. In other words, we have different problems today that demand different solutions than 35 years ago.
What kind of policies? Well, reform conservatives—or "reformicons"—want what they call family-friendly tax reform. Now, this still involves cutting the top marginal rate from 39.6 to 35 percent. But rather than trying to cut it even further, they want to expand the Child Tax Credit by $2,500 instead. The idea, as former Treasury official Robert Stein explains, is to help middle-class parents and try to get them to have more kids. This, though, has its own problems. The nonpartisan Tax Policy Center calculates that Senator Mike Lee's version of this plan would increase deficits by $2.4 trillion over 10 years. The way it structures the Child Tax Credit means it'd be worth more to upper-middle class parents than to poor ones. And it would still help the top 1 percent—and, particularly, the top 0.1 percent—more than anybody else.
But, as you can see below, it wouldn't help the top 1 percent nearly as much as Romney's plan would have. In a way, it's the policy that dare not speak its name: compassionate conservatism.
Indeed, George W. Bush's formula of tax cuts for the rich and tax credits for the rest is the only one that's been able to get Republicans elected the past 20 years.
But the supply-side Jacobins are having none of it. "I'm a classic growth conservative," Rep. Paul Ryan (R-Wis.) told John McCormack of the Weekly Standard, who "believe[s] that the best way to help families, the best way to help the economy is to reduce rates across the board" rather than expanding the Child Tax Credit instead. Daniel Mitchell of the Cato Institute downplays the idea that giving middle-class families more money even helps them, and says Republicans should keep focusing on cutting tax rates. And Kimberly Strassel of the Wall Street Journal thinks that the Lee plan is just a "capitulation to the left's inequality and middle-class talking points" that ignores the timeless lessons of, you guessed it, Ronald Reagan.
Now, for the most part, the reformicons and the supply-siders are polite to each other. But don't mistake this agreeableness for agreement. Aside from monetary policy, the biggest schism between the reformicons and the rest of the Republicans is over taxes. That's because if the Party stays with its tax-cuts-for-the-rich-solve-all-problems philosophy, there won't be much money left for anything else. They won't be able to change their message. So the biggest question for 2016 is which side the GOP's presidential candidate chooses in this debate.
In other words, whether the Republicans will keep running on Reagan, or something else.
Matt O'Brien is a reporter for Wonkblog covering economic affairs. He was previously a senior associate editor at The Atlantic.
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