The Top Rate Shouldn’t Be Our Top Tax Priority

by Reihan Salam

Because Josh Barro has emerged as the most trenchant critic of the GOP — despite overstating his case on occasion, he has a knack for identifying the weaknesses of Republican policy proposals — his take on “Why We Need Republicans” is worth reading. I think I agree with all of it.

On a related note, his recent reply to Ramesh Ponnuru’s call for a post-Reagan agenda for the GOP and Michael Gerson and Peter Wehner’s prescriptions for the party contains a fair-minded assessment of the increasingly popular (in Republican circles) call for an expanded child tax credit:

The gap between GDP growth and median-wage growth opened up well before the recession, when the labor market was much tighter. If pretax inequality is rising and that’s an important concern (as all these authors seem to think), the most obvious policy response is increased fiscal progressivity.

Ponnuru, Gerson and Wehner all get at this by endorsing a larger child tax credit, which would make the tax code more progressive, increase the standard of living of middle-class families and encourage people to have more kids. This is indeed a pro-middle-class policy that Republicans could get behind. But it also brings us to the biggest problem with these reform agendas: It would cost money, and we need to talk about how conservatives would pay for it.

Ponnuru allows that the rest of his agenda would require Republicans to abandon the goal of a 25 percent top tax rate. Gerson and Wehner say that Republicans should continue to promote “reasonable” tax rates; they don’t define “reasonable.” This is all too vague; a key driver of Republicans’ unpalatable economic agenda is the need to make room in the budget for a low top tax rate. To figure out how much room there is for Republicans to stop proposing anti-middle-class policies, we need to know how far they will scale back their commitment to lower taxes on the rich.

I don’t think that math can add up. If you’re going to expand the child credit or use some other approach to fulfill Ponnuru’s goal of providing payroll-tax relief to the middle class; and you’re going to avoid gutting the entitlement programs that working- and middle-class Americans depend on to support their standards of living; and you’re going to run only a sustainable budget deficit; then you’re going to need tax rates on high incomes or capital gains that many conservatives will probably see as “unreasonable” — for example, in the ballpark of a 40 percent top rate on ordinary income, where we are today. [Emphasis added]

My sense is that Robert Stein, the chief architect of the expanded child tax credit, who has co-authored articles advocating this strategy with Ramesh Ponnuru and Cesar Conda, accepts that the top rate on ordinary income will be in the neighborhood of 40 percent. In “Taxes and the Family,” he retained a top marginal tax rate of 35 percent while arguing that it should kick in at a lower income threshold. (The child credit would prevent this lower income threshold from having as much bite as it otherwise might.) So I don’t think Stein and Ponnuru are that far off from Josh on this point. 

Recently, I’ve been suggesting that Republicans ought to counter the president’s call for eliminating various tax expenditures to increase tax revenues beyond the levels reached under ATRA, AKA the fiscal cliff deal, by suggesting that we apply the revenue from the elimination of tax expenditures to an expanded child credit that could be used to offset payroll taxes, a la the Stein plan. This would leave the top rate under ATRA untouched while shifting the terms of the tax debate to friendlier terrain. Granted, this isn’t a consensus view among Republicans, but I think realism demands that conservatives recognize that for now at least, the political case for reducing the top marginal tax rate is relatively weak.