Posted on 01/27/2008 1:26:38 PM PST by SeekAndFind
Tax Cuts Can't Be GOP's Policy Centerpiece
David Brooks, New York Times
In 1974, a group of economists and journalists got together in a bar and launched supply-side economics. It was a superb political and economic package. It addressed a big problem: stagflation. It had a clear policy focus: marginal tax rates. It celebrated a certain sort of personality: the risk-taking entrepreneur. It made it clear that the new, growth-oriented Republican Party would be different from the old, green-eyeshade one.
Supply-side economics had a good run, but continual tax cuts can no longer be the centerpiece of Republican economic policy. The demographics have changed. The U.S. is an aging society. We have made expensive promises to our seniors. We can’t keep those promises at the current tax levels, let alone at reduced ones. As David Frum writes in “Comeback,” his indispensable new book: “In the face of such a huge fiscal gap, the days of broad, across-the-board, middle-class tax cutting are over.”
The political situation has changed, too. Republicans used to appeal to the investor class with economic policies and the working class with values, crime and welfare policies. But that formula has broken down. The workers are walking away from the G.O.P., and the only way to win them back is by listening to their economic concerns.
As a result, smart Republicans are groping for a new economic model, and as they do, Republican economic policies are shifting. The entrepreneur is no longer king. The wage-earner is king. As the presidential campaign rolls into Michigan, it’s clear that Republicans are adjusting their priorities to win back the anxious middle class.
The Republicans who are reaching toward this new model still sound very different from Democrats. They never describe American workers as victims. They never describe globalization as a remorselessly punishing process. They argue that individuals can still control their own destinies, provided they work hard and get educated. They believe it would be a catastrophe if the U.S. abandoned free trade or adopted a European-style safety net and suffered European tax rates.
But they envision a different role for government than the 1980s Republicans. “Americans aren’t afraid of competing in a global economy,” says Douglas Holtz-Eakin, John McCain’s economic adviser, “They’re afraid they’re doing it by themselves. They want a government that is on their side.” In this new model, government is sort of like Vince Lombardi, setting a context that allows individuals and families to compete.
There are four main spheres of policy innovation. First, a human capital agenda. The U.S. needs a more skilled work force, but for the first time in our history it is getting a generation no better educated than its parents.
To remedy this, Ramesh Ponnuru of The National Review proposes an increased child tax credit to reduce the stress on young families, the seedbed of human capital. Gov. Mark Sanford of South Carolina proposes tuition tax credits for families earning less than $75,000. The G.O.P. presidential candidates vow to spend more on scientific research and to take on special interests like the teachers’ unions. If schools can’t fire bad teachers and reward good ones, then nothing else we do to improve education will do any good.
Second, Republicans have embraced health care reform. While Democrats emphasize the uninsured, Republicans emphasize cost control. They understand that it’s not a question of protecting health markets from government takeover. Government already controls and distorts health care. It’s a question of straightening out the system so that it is clear who is paying and for what.
Mitt Romney supports private insurance enforced by a universal mandate. McCain talks about paying for outcomes rather than tests to cut down on unnecessary procedures. Mike Huckabee promotes an activist agenda to reduce obesity and prevent chronic illness.
Third, Republicans are putting together pieces of what you might call a resiliency agenda to help families withstand setbacks. McCain would subsidize the wages of workers who were laid off and forced to take lower-paying jobs. President Bush has proposed $3,500 personal re-employment accounts. Senator Jeff Sessions of Alabama supports $1,000 at-birth savings accounts, so that every American has assets to fall back on. Romney has a plan to aggressively increase savings, and Fred Thompson proposes a federal 401(k).
Finally, Republicans are shifting their emphasis from tax cutting to fiscal rectitude. McCain, Huckabee and Thompson emphasize spending control and dealing with the monumental problem of entitlements. Middle-class workers don’t worry so much about investment incentives. They worry that their government is fiscally decadent and fundamentally irresponsible.
This spring Ross Douthat and Reihan Salam will publish “Grand New Party,” a book about efforts to win back the so-called Sam’s Club Republicans. The book will be groundbreaking, but the campaign can’t wait. Republican candidates are shifting focus right now.
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Disagreeing with David Brooks on Taxes
by John Tamny, RealClearMarkets
Back in the early ‘70s, a time well known now for confiscatory tax rates and a falling dollar, an economics textbook proclaimed, “The era of the entrepreneur may be over in terms of the individual owner-manager who single-handedly built up a large firm.” A few years later Bill Gates started Microsoft, a garage-entrepreneur venture that now employs 79,000, and which has made Gates the richest man in the world.
The untrue scribblings of textbooks past take on new relevance given the view of Republican-leaning columnist David Brooks that the GOP should shed its modern supply-side roots. In a recent New York Times piece, Brooks opined that, “Supply-side economics has had a good run, but continual tax cuts can no longer be the centerpiece of Republican economic policy.”
Owing to what Brooks considers a changing Republican electorate, policies must shift given his belief that, “The entrepreneur is no longer king.” Instead, with anxiety levels rising among America’s middle class, the “wage-earner” has taken away the king’s crown. The contradictions in this presumed abdication are many.
First off, to whom should workers give thanks for their wages other than to entrepreneurs? Any policy centered on wage earners that doesn’t elevate the entrepreneur is the equivalent of cheering sunlight while ignoring the role of the sun. You can’t have one without the other, and it is entrepreneurs who sense unmet needs in the marketplace, attract the capital necessary to fulfill those needs, and who deploy that capital in myriad ways, including for the purpose of hiring the less entrepreneurially minded among us.
Touched on above is the truth that entrepreneurs can only innovate and hire if capital is plentiful. And as very few prominent businesses today can attribute their success to the Small Business Administration, entrepreneurs find themselves reliant on individuals willing to forego current consumption in favor of the often distant object of investment success. Of course, the amount of investment capital made available for job-creating businesses is directly correlated with how much or how little governments take from the current and future earnings of individuals. In short, without free capital there are no wages to begin with, so for Brooks to go wobbly on cutting tax rates is for him to implicitly suggest that wages should fall altogether.
Brooks might argue that Republican policy should be concentrated on the large and established wage-paying businesses in the U.S. versus the various small firms that dot the landscape, but that’s a distinction without much of a difference. All businesses, from old-guard institutions such as Ford Motor Co. and the New York Times Co. to modern capitalist marvels such as Amazon and Google, were once entrepreneurial ventures that started out small.
To the extent that there’s a difference, it reveals itself in the multiples investors will pay for the earnings of the old versus the new. It is there that we see what investors truly value, and the simple fact that they value the future earnings of Google far more than they do those of Ford speaks volumes to the staggering importance of entrepreneurs to our economy. Successful entrepreneurs attract capital, and the latter funds jobs.
For evidence of what economies look like when they’re entrepreneur-deficient, we need only look to Michigan, where the Republicans held a primary just this week. The state’s dismal outlook speaks to the folly of de-emphasizing the entrepreneur to the alleged benefit of the wage-earner. Politicians in Michigan have been doing this for decades; vainly attempting to save the jobs provided by sclerotic, old-economy automobile behemoths of yesteryear, all the while keeping taxes so high that entrepreneurs with new ideas have taken their skills elsewhere. At present the state has the nation’s highest rate of unemployment to show for all of its efforts. It says here politicians of either party won’t be talking economic “Marshall Plans” when their campaigns take them to entrepreneurial hotbeds Palo Alto, Cambridge and Austin.
Ideology aside, Brooks reasons that tax cuts must be shelved in order to pay for unfunded promises made to an “aging society,” not to mention the costly nature of new campaign promises made by allegedly enlightened Republicans which include wage subsidization, birth savings accounts, federal 401(k)s, and “personal re-employment accounts.” If we ignore for now how far afield some Republicans have strayed from the Party’s ideological moorings, it should at least be remembered that as federal revenues have pretty consistently amounted to 18 percent of GDP irrespective of the tax rate, the policy answer for newly generous Republicans should not be one of shunning tax cuts.
Instead, with Republicans apparently planning to shower all manner of new entitlements on their voters, the importance of the entrepreneur and tax cuts becomes even greater. Somehow these programs will have to be paid for, and as successful entrepreneurs by definition create wealth and high-paying jobs, the U.S. will need a flush tax base to fulfill the promises made by its politicians.
Brooks thinks differently, and applauds the Republicans who “are shifting focus right now” from a tax-cutting, entrepreneur-focused ethos that as recently as 2006 had the Party in control of all three branches of the federal government. Perhaps channeling this new focus yesterday, President Bush signaled his willingness to put off extension of his 2003 tax cuts in return for quick passage of an economic "stimulus" bill that promises not to stimulate. The Dow Jones Industrial Average quickly fell 300 points. The market's mood suggests investors are far less sanguine than Brooks about the new path taken by certain Republicans.
John Tamny is editor of RealClearMarkets, and a senior economist with H.C. Wainwright Economics. He can be reached at jtamny@realclearmarkets.com
They should promote tax cuts AND budget cuts.
Less money for government is, by definition, a good idea.
For who?
well if you cut tax rates, govt revenues do go up. That’s good because it came from a better economy but it does mean govt can get bigger by spending more money. If you want to starve the govt you also have to give a big tax credit to the lower classes.
The dems are making a big mistake by supporting this rebate stimulus. All it will do is make it harder for them to afford new spending programs because it won’t really help the economy.
David Brooks is the quintessential squishy “Conservative”. The only reason the NY Times let him in the door is because they can count on him to tell conservatives how “unreasonable” we are being on our traditional principles.
Republicans should set a goal for lower tax rates, state the rate, such as 9% and stick to it. Double digit taxation should be outlawed.
Disagree, low tax rates protect the folks who earn the money. Congress can be given 300 years to pay off their debt as they keep the spending high, the longer you take to pay off debt, the cheaper the dollars to pay it off with. Folks who earn their money today, should be given a chance to enjoy it today, before they die.
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