Bob Davis of the Wall Street Journal has a report on how reform conservatives are trying to influence GOP presidential candidates on taxes, and in it he reaches out to several members of the National Review family, including Ramesh Ponnuru, Yuval Levin, Michael Strain, and Robert Stein. My concern, however, is that Davis is misrepresenting exactly what these thinkers are trying to accomplish. Specifically, Davis maintains that reform conservatives are uninterested in cuts to marginal tax rates and that they prefer “targeted tax breaks,” to go by the article’s subheading.
At the heart of their case is the notion that income-tax cuts would have a smaller impact than they did in the 1980s when the top rate was roughly double. Rising income inequality, stagnant wages for the middle class and stubborn long-term unemployment also mean the fruits of growth are going mainly to the top, an argument also made by Democratic thinkers.
The reformicon arguments on taxes are controversial within Republican policy circles, particularly among more established—and older—economists. “To say marginal tax rates don’t matter belies economic analysis,” said Columbia University Business School Dean Glenn Hubbard, 56, who headed the Council of Economic Advisers when President George W. Bush cut taxes. “It could be good marketing, but it’s not good economics.”
It would indeed be silly to claim that “marginal tax rates don’t matter,” but of course that is not what the reform conservatives are arguing. Rather, they hold that a top marginal tax rates in the neighborhood of 40 percent is less destructive than a top marginal tax rates in the neighborhood of 70 percent, and that there are many factors that influence how responsive work effort is to tax rates. Middle-aged people with mortgages and children are less inclined to cut their work hours in response to high taxes than older people on the cusp of retirement. People who are married to high-earning spouses are more tax-sensitive than those who don’t have another earner in the family. If our goal is to make our tax code more conducive to economic growth, there is a strong case for focusing on U.S. corporate taxes, as Ryan Ellis of Americans for Tax Reform has argued, among others. Many reform conservatives, including Ponnuru, have touted the potential benefits of making business investments tax-free, a step that would make the U.S. a magnet for foreign capital. In a similar vein, many of them, like Hubbard himself in his book Seeds of Destruction (co-authored by Peter Navarro), have endorsed moving to a progressive consumption tax. While Davis seems to have led Hubbard to believe that reform conservatives are indifferent to marginal tax rates, the truth is that they by and large take exactly the same position that Hubbard does: “any progressive consumption tax reform can be done to ensure that the new system is ’progressivity-neutral’ with respect to the old system,” write Hubbard and Navarro. “This statement simply requires broadening the tax base and applying tax credits for low- and middle-income households.” Why are Hubbard and Navarro comfortable with maintaining the progressivity of the current tax code? The reason is that taxing consumption rather than income “meets the most important challenge of stimulating growth by providing maximum incentives for individual savings and business investment while removing the double taxation of capital income.” This is exactly what many reform conservatives have argued. Davis is conjuring up a conflict where none exists.
Later, Davis quotes Greg Mankiw, a thinker widely respected on the right:
Other GOP economists argue that focusing on specific tax subsidies also is a losing strategy. Democrats are bound to outbid Republicans when it comes to, say, raising the tax credit for children, and subsidies and credits often backfire, they contend.
“I don’t think the government is very good at targeting specific outcomes,” said 57-year-old Harvard economist N. Gregory Mankiw, who also headed President Bush’s economics council.
Mankiw is right that “specific tax subsidies” are generally a bad idea, which is why reform conservatives favor eliminating virtually all of them with the exception of the child credit, which reform conservatives (correctly) see as a unique case. Specifically, Robert Stein has called for paring back or phasing out a wide array of tax subsidies, including the state and local tax deduction and the mortgage-interest deduction. ”Targeting” families with children is not the kind of narrow targeting Mankiw appears to have in mind. Raising the after-tax income of middle-income families with children is not, in fairness, a particularly difficult outcome to target.
I should note that Mankiw is not always resistant to “targeting specific outcomes.” He is a leading Republican champion of a carbon tax, and he drastically underestimates the difficulties that carbon pricing would entail when we account for the need to, for example, shield low-income households and regions with carbon-intensive economies from their deleterious economic impact. It just so happens that while reform conservatives are generally skeptical of the wisdom of carbon pricing, they believe that raising the after-tax income of middle-income families via an expanded child credit, a provision of the tax code that has existed for some time and that isn’t terribly complex, is a worthwhile idea — so worthwhile that targeted tax breaks ought to be eliminated to help finance it.
There is a natural tendency on the part of reporters, including good reporters like Davis, to ferret out emerging conflicts, as conflicts are more newsworthy than nuanced and ultimately fairly minor disagreements. But I suspect that if reform conservatives sat around a table with Hubbard and Mankiw, they’d quickly reach agreement on what a better tax code might look like. The real debate is between conservatives who believe that, in the words of Keith Hennessey, “the economy is a garden, not a pie,” and liberals, who believe that the federal government must actively manage the economic life of the nation. Instead of intervening at the micro level through targeted tax policies and burdensome regulations, conservatives believe that the job of the federal government is to provide stable, consistent, transparent, and fair rules to allow for innovation and growth. Liberals who can’t stand old-fangled conservatives have every reason to feel the same way about the new-fangled kind. If there is a difference between reformicons and other conservatives, it is simply over whether Republicans have done a good job of demonstrating to middle-income Americans that they are as invested in the well-being of ordinary workers as they are in the success of business owners, and whether more efforts should be made to address this question. I’m guessing that Hubbard, who has done important work on the devastating impact of the housing bust on low- and middle-income families, and Mankiw would both fall on what I take to the be the right side of this debate.
(On a tangential note, I recommend an excellent National Affairs essay by Matthew Weinzierl of Harvard Business School, an occasional collaborator of Mankiw, on “the roots of our tax debates.” It does an excellent job of addressing the clashing principles at work when we talk about taxes.)