All about ideas…

How The GOP Became The Party of Tax Cutters (Hint: It wasn’t economics!)

with 5 comments

The following quoted text duplicates in it’s entirety Bruce Bartlett’s Tuesday, 3/20, NYTimes Economix blog but without all the links in the original blog post. You can go to the original for those.

I’ve often wondered where and why Republicans derived their tax cutting dogma…and how it took hold. It’s doubtful many others know either because until Reagan’s Administration, Republicans had been the party of fiscal responsibility and spending austerity.

Prior to John Kennedy’s Administration and even during it, the GOP maintained a strict policy priority of keeping deficits under control, even if doing so meant higher tax rates. For example, when President Kennedy wanted to cut taxes (from a top marginal rate of 91% to 65%) to spur growth and investment, Republicans rebelled saying the tax cut would increase the deficit far too much.

According to the Washington Monthly, “Keep in mind, unlike contemporary GOP policy, Kennedy’s plan distributed “peace dividends” broadly across the wage spectrum. As the Joint Committee on Internal Revenue Taxation explained at the time, the bottom 85% of the population received 59% of the benefits of JFK’s tax cut. The top 2.4% received 17.4% of the tax cut, and the top 0.4% received just 6% of it.”

Nevertheless, now I know the genesis of current GOP “tax cuts solve every economic problem” dogma. Once again I thank Mr. Bartlett for putting policy ideas in accurate historical context. As that often used phrase goes, the more we know….

Note: The bold emphasis throughout is mine, not Bartlett’s.

The Origin of Modern Republican Fiscal Policy
Bruce Bartlett
In 1976, the journalist Jude Wanniski wrote an essay, “Taxes and a Two-Santa Theory,” little noticed at the time and virtually unknown today, that put forward a theory that has had extraordinary influence on the Republican Party. Indeed, virtually everything Republicans say about taxes and spending today echoes that theory.

In 1974, Mr. Wanniski attended a conference sponsored by the American Enterprise Institute in Washington. One speaker was Robert Mundell, who had worked with the conference organizer, Arthur Laffer.

In his conference paper, Professor Mundell first articulated what came to be called “supply-side economics.” He said the mainstream economic view, based on the theories of John Maynard Keynes, was all wrong. Keynesians advocated easy money to stimulate growth and a tight fiscal policy to fight inflation.

This was the exact opposite of what was necessary, Professor Mundell said. He advocated a tight money policy to fight inflation and tax-rate reductions to stimulate growth.

Mr. Wanniski wrote a commentary, “It’s Time to Cut Taxes,” about Professor Mundell’s view that was published in The Wall Street Journal on Dec. 11, 1974. He wrote a much longer description of supply-side economics, “The Mundell-Laffer Hypothesis — A New View of the World,” that was published in the spring 1975 issue of The Public Interest, an academic journal edited by Irving Kristol.

Mr. Wanniski’s most important contribution to the emerging supply-side philosophy, however, was his “Two-Santas” article, published in The National Observer on March 6, 1976. The Observer was a weekly published by Dow Jones that folded in 1977; consequently, it has been pretty much forgotten. (The article doesn’t even appear among the archives of Mr. Wanniski’s work at the Polyconomics Web site; I retyped it myself from a reprint Jack Kemp used to hand out when I worked for him, and I posted it here.)

The essence of the Wanniski argument was that each political party needed to be a different sort of Santa Claus. The Democrats were the spending Santa Claus, promising more government benefits. The Republicans should be the tax-cut Santa Claus, he said.

Many of the nation’s problems in 1976 stemmed from the unwillingness of Republicans to play that proper role. Instead of being the tax-cut Santa, they had become the party of fiscal austerity. The balanced budget was the sine qua non of Republican economic policy. This was both bad economics and bad politics, Mr. Wanniski said.

Instead of worrying about the deficit, he said, Republicans should just cut taxes and push for faster growth, which would make the debt more bearable.

Mr. Kristol, who was very well connected to Republican leaders, quickly saw the political virtue in Mr. Wanniski’s theory. In the introduction to his 1995 book, “Neoconservatism: The Autobiography of an Idea,” Mr. Kristol explained how it affected his thinking:

I was not certain of its economic merits but quickly saw its political possibilities. To refocus Republican conservative thought on the economics of growth rather than simply on the economics of stability seemed to me very promising. Republican economics was then in truth a dismal science, explaining to the populace, parent-like, why the good things in life that they wanted were all too expensive.

Republicans didn’t immediately embrace the two-Santa theory, but began to after Ronald Reagan’s victory in 1980, when he ran mainly in favor of a big tax cut, with far less emphasis on deficit reduction. In office, Reagan pushed for domestic spending cuts but also sharply raised spending for favored programs such as the military.

Although the budget deficit rose to 6 percent of gross domestic product in 1983 from 2.7 percent in 1980, Reagan easily won re-election in 1984. This further convinced Republicans that the deficit was a losing issue and only tax cuts mattered for political success.

The final straw was George H.W. Bush’s support for a tax increase in 1990 to reduce the deficit, which many Republicans say sealed his defeat in 1992 by Bill Clinton.

Since then, fealty to tax cuts and lip service to deficits has become Republican dogma.

Among its enforcers is Grover Norquist of Americans for Tax Reform, which makes support for tax cuts and opposition to tax increases a litmus test for all Republicans.

In The Boston Globe’s Sunday magazine this week, Mr. Norquist explains that his famous tax pledge owes much to Mr. Wanniski’s two-Santa theory. Indeed, Mr. Norquist said he thought of the same idea himself when he was in the seventh grade.

I worked for Mr. Wanniski in the mid-1980s and know that he wasn’t obsessive about never raising taxes. He wanted economic growth and thought tax-rate reductions were the best way to achieve it, at least in the 1970s. But if higher taxes would raise growth, then he would support them. As he explained in an e-mail to Ben Bernanke, at the time the chairman of the president’s Council of Economic Advisers, on Aug. 11, 2005 (on which I was copied):

I for one am always ready to listen to arguments for higher taxes, more regulation and restraints on free markets, as I might be persuaded that under certain circumstances they would “invite,” not “stimulate” (a Keynesian idea), long-term growth. I’m not “anti-government,” in other words. (The Grover Norquist idea of opposing all tax increases is dumb, and Grover knows I believe that.)

Unfortunately, Mr. Wanniski opened Pandora’s box when he let loose the two-Santa theory. Republicans are now bound to it, whether they know it or not. As Keynes once put it, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

Written by Valerie Curl

March 20, 2012 at 5:01 PM

5 Responses

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  1. fascinating read.


    March 20, 2012 at 5:05 PM

  2. Excellent essay on the recent history of economics. Very enlightening. Given the current pitical climate do you think that the Ryan budget plan is more of the same lip service or a return to the earlier era of austerity?


    March 24, 2012 at 1:28 PM

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    March 28, 2012 at 6:08 AM

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