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June 30, 2014

Conservatives Are Losing Their Way on Taxes

By

Where is Jack Kemp when we really need him? His pro-growth, supply-side ideas are suddenly under assault — and not from liberals, but conservatives.

Kemp’s and, of course, Reagan’s enduring legacy is to teach us and the world over that tax rates don’t just matter a little, they matter a lot in terms of where growth happens and at what pace. Tax rates are a toll on economic activity. The Reagan and JFK tax cuts launched giant waves of prosperity for the middle class. At the state level, no-income-tax Texas is clobbering high-tax California, and Florida is bleeding New York of jobs and people.

And nearly every country in the world has cut tax rates in the last quarter-century. The cuts across the globe just keep coming as nations compete for capital and economic supremacy. Ireland is leveraging its low corporate rate of 12.5 percent to lure jobs and businesses away from the U.S. About the only places on the planet where tax rates are going up are Washington, D.C., Albany, and Sacramento.

Supply-side conservatives’ intellectual rout of liberals on this issue has been thorough and indisputable. So why do some Republicans and conservatives want to change tactics?

A new economic plan is circulating called “Room to Grow,” and one of its premises seems to be that tax rates aren’t important for the middle class. One of its key proposals is to increase tax credits to families with children and even possibly raise tax rates on others to pay for it.

The idea here is that middle-class families with kids are facing a financial squeeze and need relief.

It’s well-meaning, but a classic misdiagnosis of the problem at hand. “This is anti–supply side policy,” fumes Larry Kudlow of CNBC. “It’s just awful growth policy.”

He’s right, and here’s why: Giving every family an extra tax break, as opposed to incentivizing businesses to invest and expand and workers to work, does nothing to grow the economy. This is pure redistribution to families with children. It is better to give a man a fish rather than to teach him to fish, in other words.

This completely misunderstands the source of the economic anxiety facing families today. For most middle-class families, the central problem is not that taxes are too high. It’s that before-tax wages and salaries are not rising — they’re even falling for many income groups — thanks to Obamanomics. On average, the median household has lost about $3,000 of purchasing power since the recession began in 2008. Half of Americans think we are still in recession. The middle class is getting squeezed because the recovery is so feeble and jobs are so scarce, not because of tax increases.

The Room to Grow plan would make the federal income tax even more super-dependent on the rich, while lowering effective federal income taxes to zero on millions more families. Already the top 1 percent pay about 40 percent of federal income taxes. Under this new plan that share would rise toward 50 percent. Is this where conservatism is today?

Even worse, the Tax Foundation notes that zero-income-tax families have already proliferated over the last 20 years because of credits and loopholes. At least 40 million Americans pay no income tax. This plan would take at least another 5 million off the rolls entirely — it’s awful politics and economics. It means that close to half of Americans would have no income-tax burden. This is a tax plan that Barack Obama and the lefty redistributionists will love.

Shouldn’t it be a conservative principle that everyone pay some income tax and have some skin in the game?

Yes, these families do pay payroll taxes, but even that tax has been effectively wiped out for millions of families through refundable tax credits. We are moving rapidly toward the Marxist dream where all the taxes are paid by a smaller and smaller share of wealthy taxpayers and government benefits are free to everyone else. This is an invitation for big government to proliferate.

If conservatives want to help the middle class, the best way to do that is to grow the economy — period. The holy grail of tax policy is to get to a flat-rate tax on income, consumption, or property with rates on work, investment, saving, entrepreneurship, and risk-taking as low as possible.

High tax rates on business, investment, and work inhibit growth. Barack Obama has proven that. The voters understand what a spectacular failure his leftist big-government promises have been. Now is the time for Republicans and conservatives to be advancing big growth ideas and marketing them to voters in a populist way — the way Kemp and Reagan did.

— Stephen Moore is chief economist at the Heritage Foundation.

Originally appeared in the National Review Online

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