For three decades, supply-side economics—the belief that cutting marginal tax rates stimulates growth and promotes hiring—has been the central tenet of Republican economic policy.
It worked fairly well in the 1980s as President Reagan cut the top tax rate from 70% to 28% at its lowest, before raising it again slightly during his second term. Many conservative thinkers attribute the big growth in the 1980s entirely to those tax cuts, although massive cuts in interest rates by the Federal Reserve and an increase in military spending also did their part.
But as I and many others have argued, supply-side tax policy stopped working in the 1990s. Then, President Clinton’s hike in the top rate to 39.6% was accompanied by a booming economy, a huge bull market, and the biggest job creation in any president’s two terms.
But when President George W. Bush cut taxes to spur growth (he cut the top rate to 35% and also dropped dividends and capital gains to 15%), it produced only a modest recovery and two million jobs at best. More than a decade later, President Obama and Congress are still fighting over those useless tax cuts.
Still, even though supply-side economics has failed for a long time, it’s been an article of faith among Republicans. Why? Primarily for political reasons, I’d say: Cutting taxes has helped them win many, many elections.
Now there are big cracks in the political façade. Conservative ideological luminary William Kristol made the following astonishing remarks on Fox News Sunday with Chris Wallace:
…You know what? It won’t kill the country if we raise taxes a little bit on millionaires. It really won’t, I don’t think.
I don’t really understand why Republicans don’t take [President] Obama’s offer to raise taxes for everyone [above] $250,000… Really, the Republican Party is going to fall on its sword to defend a bunch of millionaires, half of whom voted Democratic and half of whom live in Hollywood?
And here’s the independent-minded conservative and former Bush speech writer David Frum;
The primary problem is an economic message that does not resonate with the middle class. Back in the 1970s, the tax burden on ordinary middle-class people because of inflation had doubled…. So, in 1980, if you said what I’m going to do for middle-class people is cut their taxes, that message had power.
Today 80% of Americans pay more in payroll tax than in income tax. And the tax cut as the whole of the economic message doesn’t resonate in a world of stagnant wages, rising health care costs, rising tuition. And if you don’t have answers to that, you’re not talking to America.
This is heresy, but it’s part of the GOP’s serious reexamination of their policies in the wake of last week’s decisive election defeat.
Republicans are now fighting to preserve existing tax cuts, not introducing new ones, as they hash out a budget deal with the president. After Mitt Romney’s failed campaign, in which tax cuts became a central plank and a thorn in his side, I wouldn’t be surprised if Republicans quietly abandon this idea and substitute broad-based tax reform instead. Because as Kristol and Frum point out, this has become a political loser.
So, although true believers like Arthur Laffer and Larry Kudlow may prattle on like trained parrots about tax cuts, they’re on the losing side of history and they should recognize it the way shrewder political minds already have.