The Public Policy /A Supply-Side Strategy
Frum, David
A Supply-Side Strategy by David Frum D oes the fact that a policy is driven by polling and cynicism in itself prove the policy wrong? If the answer is yes, then nothing could be more wrong than the...
...Letting people—including middle-income peo46 The American Spectator July 1995 ple—keep more of the money they earn is a value in itself, a value that conservatives above all others ought to cherish...
...Nervous Republican senators shouldunderstand, however, that rejecting the middle-income tax cut can also have scary consequences...
...But that doesn't mean he's paying 28 percent of his income in taxes...
...No wonder they give senators the willies...
...Why...
...Families at the median income (now $42,000) pay more in federal taxes of all kinds than ever before...
...Meanwhile, their wealthier compatriots still enjoy tax rates generally below those they faced in the early 1980s, while millions of poorer people have been dropped from the rolls altogether by the 1986 tax reform and Bill Clinton's expansion of the fraud-plagued Earned Income Tax Credit...
...The Republicans would be wise to head the Democrats off at this particular pass—and the per-child tax credit is one of the least bad ways to do it...
...Unfortunately, to understand why supply-side lost its glamour, you must hold your nose and immerse yourself in the complexities of the tax code...
...And each time they have promptly wreaked punishment on the politicians who deceived them...
...Since 1987 the tax plight of middle-income people has sharply worsened...
...In his memoir of the early years of the Reagan administration, former assistant Treasury secretary Paul Craig Roberts sharply distinguished between "lower average tax rates, which do not improve incentives, and lower marginal rates, which do...
...And a bigger credit on the twenty-fifth anniversary...
...Moynihan proposed cutting back this payroll tax until it raised no more money than was currently needed to pay Social Security benefits...
...The credit flatly defies conservatism's economic logic...
...The average tax rate and the marginal tax rate need not move in tandem...
...Collections from the combined personal income tax and corporate income tax soared by nearly 60 percent between 1981 and 1990, despite dramatically lower rates...
...Twice in three years the middle class has begged for help—once by electing Bill Clinton in 1992 and then again by electing a Republican majority in 1994...
...Why not tax credits for employers who employ a certain number of blacks or disabled people...
...That would have added $50 billion to the deficit—money that Moynihan hoped and expected to recoup by levying heavier income taxes in place of the regressive payroll tax...
...Abolishing it now would capsize the housing market...
...Middle-class tax cuts—tax cuts that bring down the average rate of tax—must be financed by reductions in government spending...
...So it remains in the tax code, much the way the old English doctrine that you cannot sue the government without its consent hangs on in tort law—a total illogicality fossilized by the sheer passage of time...
...Why...
...But mounting payroll tax charges gobbled virtually all of that tax relief up: between 1980 and 1990, the combined employer-employee payroll tax rate rose from 12.26 to 15.3 percent...
...It does not create incentives to work or invest...
...Tax cuts ignited a stagnant economy, and lower tax rates reaped a fat harvest of revenues for Washington...
...Theoretically, that surplus is being accumulated for disbursement in future years...
...Unfortunately, the United States does not happen to possess such a textbook tax code, and likely never will...
...Marginal tax rates dropped precipitously (from up to 70 percent in 1980 to a maximum of 28 percent in 1987), while average tax rates drifted downward far less dramatically...
...But even a modest reduction in the average rate of tax paid by the colossal American middle class can cost Washington dozens of billions of dollars...
...T he achievements of supply-side economics in the 1980s were very real...
...But the political deficiencies of the supply-side were real, too...
...If the answer is yes, then nothing could be more wrong than the Republicans' $500-perchild tax credit...
...In order to right a glaring wrong: the remorseless rise in the federal tax obligations of middle-income taxpayers, while other taxpayers enjoyed true tax cuts...
...But improving incentives ought not to exhaust the goals of conservative economic policy...
...Daniel Patrick Moynihan began to complain, correctly, that the 15.3 percent payroll tax raises vastly more money than the Social Security system disburses...
...That alone should give pause to any senator pondering shelving the per-child credit in 1995...
...His take-home pay hardly budged...
...The mortgage interest deduction, for example, is virtually impossible to justify economically, but its existence has been factored into the value of every dwelling unit in the country...
...Please recall the textbook definition of what the tax code is for: not social engineering, but raising revenue for the government in the manner that distorts private decision-making the least...
...Twice they have been cheated—once by George Bush when he broke his "read my lips" pledge, and once by Clinton...
...One of the beauties of a cut in the marginal rate is that it permits reluctant budget-cutters to represent themselves as tax slashers...
...It's quite possible for marginal rates to plunge without affecting average rates very much at all—and that's pretty close to what happened in the 1980s...
...B etween 1981 and 1987, Ronald Reagan did indeed relieve the income tax burdens of middle-income people: a family of four earning the median income ($26,000 in 1981) paid 11.79 percent of that income in income taxes on Reagan's Inaugural Day, and just 8.9 percent six years later...
...Through the 1970s, a Democratic Congress mucked up the tax code with incentives for investment choices the legislators liked: investment in cattle ranches and oil wells, solar energy and the renovation of historic buildings...
...The Democrats, with their customary death wish, brushed Moynihan's plan aside...
...A shoe salesman reviewing his pay stubs would see a gratifying drop in the box marked "income taxes," but an almost exactly equivalent jump in the box marked "FICA...
...True, the credit may spur consumer spending by parents—but Republican anti-Keynesians have disparaged the growth-inducing powers of consumer spending for two decades now...
...This favoritism produced notoriously perverse results...
...It's not unreasonable to ask them to extendequivalent charity to a per-child credit...
...By promoting over-investment in housing at the expense of other things, the mortgage interest deduction has done far more harm than any child credit ever could...
...But of course, it's really being spent—in exchange for IOUs to Social Security from the Treasury...
...He was, of course, correct...
...More important still, because upper-income people typically have more control over how hard they work and how much income they declare, lowering maringal rates on them can actually raise more revenue...
...But it's easy to see the temptations opened up by this new style of tax preference for socially desirable actions: President Clinton has already responded to the Contract by proposing new tax advantages for spending on education...
...The tax reform of 1986 finally purged the code of some of these rococo elements, but congressional tax writers still often presume to know better than the market where investment capital should flow...
...And in fact, there's much not to like about the credit...
...No wonder that some economics-minded conservatives can be heard grumbling that they would like to junk the credit—or that it has encountered such skepticism in the Senate...
...and a value, ahem, that scoops up votes...
...But it's still moldering in their arsenal, ready to be used by liberal politicians clever and more ruthless than the current feckless bunch...
...In the early 1980s, at a time of economic stagnation, some supply-siders disparaged the economic significance of the tax burdens on the middle class...
...In a country beginning to recognize divorce as a massive problem, what about a tax credit for couples who have remained married for ten years...
...That argues for a simple tax on either income or consumption, at low rates, with the smallest feasible number of exemptions, deductions, and credits...
...Subsidizing investment in farmland, for example, helped push the price of land to unsustainable heights, exacerbating the collapse of farm values in the early 1980s, which in turn contributed to the doom of the family farms Congress was trying to protect...
...As a result, his effective average federal income tax rate clocks in at about 20 percent, not counting payroll tax...
...In the Bush administration, Sen...
...Cuts in the average rate of tax on middle-class families cannot...
...As they chanted at the 1988 presidential convention, "Thank you, Ron...
...The conduct to be encouraged by the Contract's credits is, to be sure, genuinely laudable...
...The Contract With America promised not merely a per-child tax credit, but a refundable credit of up to $5,000 for families that adopt children, and a $500 credit for famiDavid Frum is the author of Dead Right, now available in paperback from New Republic/BasicBooks...
...no wonder that Bill Clinton's promise of a middle-class tax cut thrust him into first place among Democrats before a single primary vote had been cast in 1992...
...Cuts in the marginal rate can, under the right circumstances, even be financed by the economic growth they spark...
...Because so few Americans earn really big incomes, it's possible to cut their marginal rates of tax dramatically without costing the Treasury very much income...
...Now the mood has shifted, and the new Republican Congress wants to use the tax code to encourage correct moral behavior instead of correct investment behavior...
...He faces a marginal federal income tax rate of 28 percent—meaning that if he gets a $1,000 raise, he takes home $720 more...
...Imagine an unmarried taxpayer earning $50,000 a year...
...And yet economists and business-oriented conservatives generally have made their peace with that exception to tax purity over time...
...No wonder polls showed the public responding to Democratic cries for higher taxes on the rich in 1988...
...0 The American Spectator July 1995 47...
...He pays a federal income tax of only 15 percent on his first $22,100 in income...
...Clinton's breach of that promise now opens a magnificent Republican opportunity...
...lies that care for an elderly parent or grandparent at home...
Vol. 28 • July 1995 • No. 7
