By Ralf Seiffe
An article by Jonathon Rauch in June’s issue of The Atlantic Monthly signals that Democrats may be ready to move from emotion to logic in making the case for raising income taxes. On the losing end of the tax debates since the Reagan Revolution began a generation ago, these governmentalists long for the time when the American people believed that Washington was to be trusted and financed with whatever resources it desired. Citing empirical evidence developed by William Niskanen of the Cato Institute, Mr. Rauch’s article argues that a small, upward income tax hike--to 19% from last year’s 17.8% rate--would cure the federal deficit. Republicans should take notice of this small vision and let the Democrats shift such mosquito effluence. In the meantime, the GOP should position themselves as the agent of real change and launch the next America tax revolution.
On first read, Mr. Rauch’s article seems plausible. Its premise is there is an inverse relationship between the aggregate level of taxation and federal budget deficits. It posits there is an equilibrium point where the federal tax bite tends to signal politicians to balance budgets. This stoichiometric tax rate is at least 19% according to Rauch; less camouflages the true cost of government while higher rates tends to shrink government because of the pain higher rates inflict.
The reasoning behind this appears to be a classic supply and demand argument applied to government. Lower the price of a commodity and you will get more of it while raising the price will generate less demand. This makes sense until one realizes there is no connection in the public’s mind between taxes, that is price of benefits, and the largess the government provides. Indeed, the major purpose of the federal government since the New Deal seems to be the separation of costs and benefits; liberal canon is to provide benefits for citizens that do not pay taxes and oblige the rich to pay for them.
Moreover, Rauch’s analysis completely ignores what happens to federal revenues when marginal rates are reduced. In each and every case since the Kennedy tax cuts in the 1960’s, reductions in tax rates have flooded the treasury with unexpected revenues. Politicians instantly spent the money--and more. This behavior will not be remedied by some nebulous, magic tax rate that automatically disciplines politicians into balancing budgets.
But Republicans won the marginal tax rate argument years ago. If the Democrats are too intellectually invested to swallow their dogma and enjoy the extra revenue tax cuts provide, let them play some Moody Blues and search for that “lost chord” income tax rate.
While they do, Republicans should plan a bushwhack with an entirely new tax plan that will be a bigger--and more positive--majority maker than the original Reagan Revolution. Republican should re-establish themselves the party that cares about taxes--and has the academic thought to support them, just as they did in 1980. Doing this would have a couple of advantages and a danger. The first advantage for Republicans would be to reclaim their base. By proposing a radical new tax system, Republican legislators could change the focus from their profligate spending to a more hopeful message. The second would be to create a real differentiation between Republicans and Democrats and help the GOP reclaim the “Reagan Democrats.”
The danger is that there may not be enough real Republicans to operate this strategy.
Despite the wasted motion that was last year’s presidential tax commission, Republicans have a couple of plans that would qualify as a radical change. The Flat Tax and The Fair Tax were completely ignored by the commission but they are just the sort of plans real Republicans should be proposing. For those who value liberty, the Fair Tax is the better choice because it eliminates the government’s interest in one’s financial affairs and replaces every federal tax and substitutes it with a retail sales tax. It seems to me that advocating a no-deduction paycheck should be an easy sell. In fact, the advocates of the Fair Tax tell us that nearly everyone--Republican or Democrat--overwhelmingly support the Fair Tax once they understand it.
If that’s true, Republicans should quickly adopt the Fair Tax as one of the three issues they take to the electorate in the fall. Along with the War on Terrorism and whatever the most important local issue might be, a really refreshing, large-scope tax idea will reinvigorate the body politic. There are already 55 sponsors signed on to the current Fair Tax proposal in the House of Representatives, so this is not a completely unique idea. By adopting the Fair Tax as a national priority, and spending some of their treasure on media to support that idea, Republicans would show themselves as leaders rather than victims of the left’s insult de jour. If they do, Republicans will find the 2006 contest one they enjoy and set the stage to pay huge dividends in 2008, presumably tax-free.
