Posted: January 28, 2008
epublicans, including President Bush, have said a lot of silly things in defense of tax cuts. In the opening pages of The Big Con, Jonathan Chait, a senior editor at the New Republic, zeroes in on the way conservatives have abused the Laffer Curve—and more reflective conservatives should wince to read those pages.
The Laffer Curve, you will recall, is a graphical representation of the simple truth that above a certain point, increases in the tax rate will prove self-defeating: they will so discourage economic activity that they will cause revenue to decline. But as Chait points out, it does not follow from this fact that every tax cut will increase revenue. If our tax rate is already below the revenue-maximizing point, then reducing that rate will reduce revenue. The effect of a particular tax cut on revenues is an empirical matter, not something that can be deduced from first principles.
Yet many Republicans, and conservative journalists, have claimed that tax cuts always raise revenue. (Chait quotes John McCain, who told me earlier this year, "Tax cuts, starting with Kennedy, as we all know, increase revenues.") President Bush points out that revenues have increased since he cut taxes. That's true. He then concludes that "the deficit would have been bigger without the tax-relief package," which is a non sequitur. The tax cuts caused all of that revenue growth only if they are responsible for all of the economic growth that has happened since their enactment. That would be a very implausible assumption. A more realistic one would suggest that Bush's tax cuts have caused revenues to grow more slowly than they would otherwise have done: that revenues are lower than they would have been without his tax cuts.
Chait also points out that Bush adopted this argument opportunistically. Originally he sold his tax cuts as a way of getting rid of the budget surplus—remember that?—so that Washington could not spend it. Only later, when the surplus had disappeared, did his spokesmen start saying that tax cuts were necessary to bring it back.
Conservatives regularly exaggerate the effect of taxes on the economy, as when they attributed the 1990 recession to the first President Bush's tax increase and predicted that doom would follow President Clinton's 1993 tax increase. Chait puts his finger on the analytical failure here. Ronald Reagan cut the top tax rate from 70% to 50% and then to 28%. That meant that high-earners went from keeping 30 cents of every extra dollar they earn, to 50, to 72. So their reward on effort went up 67% and then an additional 44%. The 1990 and 1993 tax increases, which took the top rate to 39.6%, had a much smaller effect. Together they reduced incentives by 44%. Conservatives who condemned each tax increase separately, as a guarantee of disaster, just didn't do the math.
Conservatives have also argued for tax cuts on the basis of the theory that they will "starve the beast," i.e., that they will bring government spending down. Chait, for the most part, argues that this theory is incorrect. In my view, what has happened here is another case of a valid insight being taken too far. Milton Friedman correctly noted that total federal spending must equal federal revenues plus the maximum politically acceptable deficit. But it does not follow that reducing revenues would reduce spending. If the effort to reduce revenues also increased the political system's tolerance of deficits—because advocates of the tax cuts said that deficits do not matter, or because they made voters regard government as a source of goodies—then spending could go up.
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Chait is at his best—funny, smart, and sparkling—in these early sections of the book. But his ambitions go well beyond disproving some economic assertions that conservatives are wont to make. That conservatives make false claims about taxes is just one link in a chain of premises leading to his destination: that a cabal of fanatics and plutocrats are running the country. Not surprisingly, the argument weakens as Chait goes along.
One weak link is Chait's unstable definition of "supply-side economics." According to Chait, "supply-siders don't believe in the business cycle. They believe tax rates determine everything." But very few people meet that description, which is perhaps why Chait doesn't supply a quote from anyone to back up the claim. My colleague Lawrence Kudlow is surely a pure supply-sider if ever there was one. But not even he believes that taxes determine everything: he spent a lot of time this summer arguing for a change in the Federal Reserve's monetary policy.
Chait identifies several conservative figures and organs of opinion as "supply-siders" because they almost always support tax cuts. Bob Dole is described as having adopted "the Laffer Curve" because he proposed tax cuts in his presidential campaign in 1996; but he didn't claim that those tax cuts would raise revenue. Nor do all conservative journals claim that tax cuts invariably increase revenue, and in fact none claims that recessions are purely the result of tax policy.
You would never guess from Chait's book that it is possible to be a moderate supply-sider. Moderate supply-siders do not claim that tax cuts always increase government revenue. They say that some tax cuts improve incentives to work, save, and invest, and that this effect partially offsets any revenue reduction that they cause. They say, as well, that tax hikes that reduce these incentives will raise less money than you would expect if you ignored their economic effect. A moderate supply-sider would say that it was wrong to get hysterical about the tax increases of the early 1990s, but not wrong to oppose them: they dampened the recovery from the recession, especially in its early years.
Chait doesn't advance an argument against this viewpoint. He never claims that Clinton's tax increase promoted growth in the 1990s, or that Bush's tax cuts have failed to promote growth in this decade. And it's not the only question Chait doesn't consider. Do estate taxes reduce capital formation and induce a lot of unproductive tax-avoiding activity? Would the economy do better if we went from taxing income to taxing consumption? How much has conservative tax policy contributed to the increase in inequality in recent decades? (Chait asserts, without offering any numbers, that it has "without a doubt contributed mightily" to this gulf.)
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In short, you can accept everything Chait has to say about the folly of exaggerated claims about taxes and still think conservatives were right in their bottom-line conclusions about tax policy over the last two decades. If that's true, then the notion that a cabal of fanatics and plutocrats has hijacked American politics loses a lot of its power.
If that conceit were valid, of course, it would raise the question of how a small, nutty group seized so much power. Much of The Big Con is devoted to answering that question. The answer is not that the cabal's nostrums are popular. Chait points to surveys that show that over the last decade the public has preferred either deficit reduction or social spending to tax cuts. Chait is surprisingly dismissive of one answer that has currency on the Left: that the GOP has exploited social issues in order to deflect voters from its economic platform. He rejects that theory because the country has gotten more socially liberal during the very years that supply-side Republicans have been gaining power. (His reasoning goes awry here. A society can be happy with the changes it has made and still want to apply the brakes.)
Instead, Chait posits that the cabal succeeded by lying. It exploited outdated norms: the press, seeking to be evenhanded, could not see the rise of a new, extremist ideology and would not report on it as such. The cabal distracted the media and the public by inventing the "character issue" to use against Democrats. And it built a political machine willing to abuse power to get its way. Most of what Chait has to say here is partisan wailing. Just about every example of Republican dissembling or ruthlessness can be met with a counterexample on the Democratic side.
Chait says it cannot be a coincidence that the last three Democratic presidential nominees have been denounced as unprincipled flip-floppers; and that it's unlikely that Democrats simply tend to have little character. These thoughts start him theorizing about how Republicans have injected a spurious critique of Democratic vacillation into the nation's political bloodstream. As is often the case when Chait is writing in this vein, all the benefit of the doubt goes toward the service of his thesis. So John Kerry is defended against the charge of flip-flopping on the defense-supplemental bill of 2004, the one he famously voted for before voting against. Chait's defense is that Kerry voted for it when it was paid for by raising taxes and voted against it when it wasn't. But he ignores the fact that Kerry had himself said previously that it would be irresponsible to vote against the bill, even in the absence of a tax increase. Leave that aside. Most Republican presidential candidates of the past century have been attacked as dumb. Surely that's not a coincidence, either? Should we try to explain this phenomenon by reference to a Democratic dirty-tricks machine?
Double standards abound in The Big Con. The defeat of Clinton's health-care and economic stimulus bills by a Congress of the same party shows that Democrats don't have a disciplined party machine; the failure of Bush's Social Security reform and nomination of Harriet Miers just shows how extreme he is. The fact that Clinton's health proposal polled worse when it was attached to his name shows how Republicans use personal attacks; the fact that the same thing could be said about Bush's Social Security proposal is not mentioned. President Bush's support for the farm bill of 2002 and for steel tariffs shows that Republicans will do anything to help corporate interests; Democrats' support for both initiatives is passed over in silence. The fact that modern Republicans propose to abolish the estate tax, something they would never have done 30 years ago, is proof that the party has been radicalized; the fact that modern Democrats routinely filibuster conservative judicial nominees, which they would never have done 30 years ago, is indicative of nothing (a type of omission that says a lot about Chait's narrow focus).
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But enough. how persuasive you will find Chait's account, or my attempt to poke holes in it, will depend on whether you are the type of person who considers plausible his claim that the press debunks President Bush's factual claims only on "rare occasions."
Chait is nostalgic for a time when people who wanted to cut taxes and shrink the government were marginalized, when the New Deal consensus was robust, and when the Republican party was typified by people like David Gergen and Kenneth Duberstein. It would be easy to construct a sort of anti-matter version of Chait's story if you were nostalgic for the days when, say, the Democrats were a relatively socially conservative party and nobody dreamed of defending partial-birth abortion. You could talk about the extremism of current policy—abortion on demand for all nine months, and the lies and subversions of democracy that have kept that policy in place—and you would be right on all counts. I wrote that book myself. But I didn't say that a small cabal had hijacked the national government.
Chait writes that "the supply-siders have taken the germ of a decent point—that marginal tax rates matter—and stretched it, beyond all plausibility, into a monocausal explanation of the world." Physician, heal thyself.