Should Republicans Stop Giving Tax Cuts to the Rich?

U.S. Rep. Paul Ryan speaks during a session on "The Business of Taxes" at the Wall Street Journal's CEO Council meeting in Washington December 2, 2014. Cutting taxes has been the GOP’s mantra for decades. But lower paid workers don’t like it, the author writes. Kevin Lamarque/Reuters

This article first appeared on the American Enterprise Institute site.

Reihan Salam writes about a possible post-Trump GOP policy agenda—more populist, more middle-class focused.

Salam outlines a number of proposals, as well as what the GOP should avoid:

The GOP can no longer survive as the party of tax cuts for the rich.… If Republicans are to win the trust of working- and middle-class voters who’ve grown deeply skeptical of their economic nostrums, they will have to do something dramatic: It’s time for the GOP to abandon its near-obsessive devotion to tax cuts that disproportionately benefit upper-income households.

The GOP should continue to back tax cuts for the middle class, and in particular for middle-class parents. But until the country sees large and sustained budget surpluses, there should be no tax cuts for households earning $250,000 or more.…

While there are growth-friendly tax reforms that would preserve or even increase the progressivity of the current tax code, this proposal will still be difficult for supply-siders to bear. And that’s to the good. For too long, Republicans have been excessively beholden to voters at the top of the income spectrum, and swearing off tax cuts for the rich would be an excellent way to prove that they’ve turned over a new leaf.

As a matter of politics, there is much to recommend here from Salam’s suggestions. I’ve written repeatedly how the tax-cut issue has lost its political oomph.

A few data nuggets from the polls: (a) in the early 1980s, 70 percent of Americans thought their taxes were too high versus 50 percent today; (b) middle-class Americans, by 53 percent to 42 percent, think they’re paying their fair share in taxes; (c) Americans rank taxes low on their list of concerns—even below climate change; (d) Americans think raising the minimum wage and business deregulation are better ways to boost economic growth than cutting tax rates on the business and the wealthy.

And let me highlight this YouGov finding from last year:

Americans tend to be skeptical of the idea that lower taxes on the wealthy stimulates the economy, with the end result of greater wealth for everyone. 45 percent of Americans say that they disagree with the idea, while 29 percent say that they agree with it.

Most Democrats (62 percent) disagree, while most Republicans (50 percent) agree with the theory. Independents tend to disagree (42 percent) rather than agree (28 percent) with the idea.

So what should a conservatively reform GOP be for? Well, among the possibilities Salam suggests, tax cuts for middle families, as stated above. Also corporate tax reform framed as making the U.S. more hospitable to business investment and insourcing from abroad, particularly manufacturing.

Same approach for infrastructure investment. And for workers displaced by globalization and automation, “one promising idea is a wage insurance program that provides workers with a strong incentive for rapid re-employment.”

Immigration reform that’s friendly to newcomers who can “pay their own way” by earning high wages and who won’t need public assistance.

Let me quote at length about reforming Social Security, Medicare, Obamacare, and the rest of the safety net:

Republicans ought to reform old-age entitlements to make them sustainable over the long haul. But in doing so, they must ensure that these programs perform their core functions better than they do today, particularly for the poorest and most vulnerable seniors.

To improve Social Security, Republicans might back a package of reforms that would encourage older Americans to work by slashing or eliminating their property taxes and that would ensure that all seniors receive a benefit that would keep them from falling into poverty, which is not currently the case.

On Medicare, they could improve the quality of care for seniors while lowering costs by defaulting seniors into Medicare Advantage, a program that allows beneficiaries to access high-quality private insurance coverage. …

The best way forward for the right would be to call an Obamacare truce: accept that the exchanges are here to stay, as they’re a guarantee that people with pre-existing conditions will always have access to health insurance they can afford. The GOP should instead focus on reforming Obamacare so that people would have the option to buy lightly regulated plans with their own money.

And there’s more, including an anti-poverty program built around refundable earnings and child tax credits. But I think the key here is trust. Middle-income and working-class voters need to trust center-right policymakers, which is why Salam is calling for a (high-end) tax cut pause as a big, splashy first step in that direction.

Along similar lines, my AEI colleague Mike Strain has argued that “there are several problems facing the country today that are more urgent than the tax code and that, if improved, would offer greater social and economic benefit than a modestly larger economy.”

Random thoughts:

  • Is the full pause necessary? Maybe. But perhaps argue against higher labor income taxes and for a small reduction in investment taxes by citing levels seen during the 1990s boom.
  • Also, as important as grand gestures is having policymakers consistently and persistently advocate pro-middle class policies—especially education—as a top priority with the same enthusiasm currently reserved for tax plans
  • Another idea is looking at tax policy around innovation and creating a healthier ecosystem for potential high-impact startups. So a more limited, focused approach.
  • I would also like to see the budget math on a plan that cuts taxes for the broad middle class and also creates budget surpluses. Somebody would be paying higher taxes here, such as through base broadening, yes?

Anyway, really excellent piece, and I will give Salam the final word:

Conservative reformers of earlier eras recognized that to protect and defend capitalism, they needed to ensure that everyone could share in the wealth it creates. This was true of Theodore Roosevelt in the progressive era, and it was true of Ronald Reagan, who broke with his free-trade convictions to protect vulnerable American industries and backed tax reforms that closed loopholes used only by the richest of the rich. Reagan was a conservative true believer, but he also recognized that rapid economic change could cause chaos and dislocation, and that government had a role to play in smoothing out its rough edges.

What defenders of the Republican status quo fail to realize is that unless the party speaks to the interests of working-class voters, they won’t just face slightly higher capital gains taxes or more wasteful spending under a Hillary Clinton administration. They will face a backlash from within that threatens to profoundly damage a party that, at its best, is a champion of the core social and economic institutions that made America great in the first place.

James Pethokoukis is a columnist and blogger at the American Enterprise Institute. Previously, he was the Washington columnist for Reuters Breakingviews.