Tax Cuts as Political Strategy

by Reihan Salam

To understand why promises of tax cuts have lost their political appeal, I recommend reading Monica Prasad’s short article on the subject:

President Reagan and Congressional Republicans discovered that broad tax cuts may appeal to working-class voters even if richer constituents reap most of the rewards. The key GOP move was to keep tax-cut promises sweepingly general. Survey research reveals that if voters are given a choice between tax cuts and spending on specific programs, they choose to maintain or increase spending. When they are given a choice between tax cuts and lower deficit levels, they choose lower deficits. But it is a different matter if no one mentions the need to cut specific programs or the possibility of higher deficits. In that case, voters assume that tax cuts will be paid for by cuts in “government waste.” This is the centerpiece of the Republican tax cut strategy. 1980s Republicans had few moral qualms about promising tax cuts without mentioning the specific programs that might have to be cut. They saw this approach as the strategic analogue to years of Democratic promises to increase spending without detailing how to pay for new or expanded programs. 

One challenge for Republican advocates of tax cuts is that while U.S. national debt was under 33 percent of GDP in 1981, it is now just over 100 percent of GDP.

The American left consistently overstates the power of business. Because of this, many scholars and analysts fail to appreciate the true political appeal of tax cuts to many voters. This political appeal is real, but it is also fragile. Voters only support tax cuts as long as they believe that tax cuts will not lead to decreased spending or increased deficits. Republican politicians and activists have driven up support for tax cuts by downplaying the tradeoffs between taxes and spending. Highlighting these tradeoffs will bring voting behavior in line with voters’ true preferences.

In the post-crisis period, conservatives have insisted on deficit reduction and revenue-neutral tax reform coupled with sharp reductions in marginal tax rates. This represents a reaction against deficit-financed tax cuts of earlier eras, which are now seen by many on the right a driver of spending increases (the “serve-the-check” theory as opposed to the “starve-the-beast” theory) and as unsustainable given the deterioration of the federal government’s fiscal position.

But this more rigorous approach highlights the tradeoffs between taxes and spending, and voters have tended to choose higher taxes (on the top 1% or 2% of earners, which is to say other people) rather than spending cuts. Democrats have profited from this new political dynamic because they have generally refused to acknowledge that middle-income tax increases will be required to achieve fiscal balance.

This new competitive landscape cuts against the GOP’s traditional tax cut strategy (focus on marginal tax rates), and it tends to reinforce Ramesh Ponnuru’s argument that conservatives ought to instead emphasize middle-income tax relief as a means of encouraging spending restraint. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.