Taxing Credibility

Although Congress has now agreed to a scaled-back version of President Bush’s tax plan, the president has clearly had a more difficult time selling a tax cut this year than he did two years ago. Disappearance of the surplus made his job more difficult, certainly. But on the other hand, the economy is in much worse shape, which normally makes Congress highly receptive to anything labeled a “stimulus” program.

Perhaps one reason for the president’s problem, one that could dog his efforts to get through the additional cuts he still hopes for, is that his tax program lacks an underlying philosophy. Cutting taxes for the sake of cutting taxes may be enough justification for conservative Republicans, but not for others. They need persuading not only that tax cuts are preferable to deficit reduction but also that each particular tax cut is one we need now.

The White House itself seems uncertain about why it is doing what it is doing. On some days, the plan to eliminate taxes on dividends was sold as a step toward fundamental tax reform and a cure for corporate governance problems. On others, it was promoted as Keynesian pump-priming.

When people are not sure what the administration really believes, its enemies may be able to convince people that political expediency is the driving thrust. Such a perception can be deadly on election day. By contrast, voters are inclined to give the benefit of the doubt to those, like President Reagan, who appear guided by core beliefs -- even if those beliefs aren’t shared by the majority.

Look at Bush’s generally high marks on foreign policy. In that area, he has deeply held beliefs that fit into a coherent worldview. This worldview -- known as neoconservatism -- has many articulate supporters who have honed their arguments in academic and popular journals for decades. For this reason, even those who disagree with Bush’s foreign policy tend to respect his convictions.

Neoconservatives also have a coherent view of economic policy, called supply-side economics. It underlay Reagan’s economic policies and would fit with Bush’s as well. By bringing supply-side economics back into the foreground, the president could present a more coherent economic policy and better arguments for selling it.

Historically, conservative economics focused on two things: balancing the federal budget and attacking trade unions. From the 1930s through the mid-1970s, these were the twin pillars of conservative economic thought, at least insofar as they manifested themselves in congressional debate. Generally speaking, conservatives thought that unions and deficits were the root of all evil. If we could just get them under control, everything would be OK.

Neoconservatives saw things differently. They were sympathetic to unions because they represented the working man, whom they viewed as fundamentally conservative on cultural issues and foreign policy. Later, such people came to be known as “Reagan Democrats.” It is worth remembering that union leaders like George Meany and Lane Kirkland were stalwart anti-communists, and that New Left groups like Students for a Democratic Society reserved their deepest scorn for “hard hat” construction workers and others associated with President Nixon’s “silent majority” of conservative voters.

Neoconservatives also differed fundamentally with traditional conservatives on the deficit and how best to regulate the size of government. Old-style conservatives thought that controlling the deficit was crucial to a sound fiscal policy. Consequently, they consistently voted against tax cuts and for tax increases. They expended enormous energy in fruitless efforts to cut Social Security, Medicare and other programs highly popular with the middle class.

Neoconservatives thought that attacking massively popular spending programs was both counterproductive and politically hopeless. Congress would never vote to cut such programs directly, and would not even restrain their growth unless under enormous political pressure.

And so, they approached things differently. First, they concluded that it is the relative size of government, not its absolute size, that is most important. In other words, government spending as a share of the gross domestic product was what mattered. For neocons, increasing the GDP is as important as lowering spending. Earlier conservatives had concentrated almost exclusively on controlling spending, assuming that increasing GDP was beyond government’s grasp.

Second, neoconservatives absorbed the insights of Public Choice, an economic school led by Nobel Prize winner James Buchanan. One of Buchanan’s theories, developed in academic papers and books during the mid-1970s, held that the size of government is better controlled on the tax side than the spending side. Cutting spending directly, while desirable, was often impossible in the absence of special circumstances, because the beneficiaries of spending were well organized and motivated, while those favoring lower spending were disorganized and diffused.

Neoconservatives saw tax cuts as a single solution to both problems. Lower tax rates would spur economic growth. If growth increased faster than spending, then spending’s share of GDP would fall without the necessity of cutting spending directly. At the same time, they reasoned, budget deficits resulting from lower taxes would mobilize movements advocating reduced spending.

In his 1995 book “Neo-conservatism: The Autobiography of an Idea,” Irving Kristol, the father of neoconservatism, explained how he brought these strands of thinking together and made them part of the neoconservative agenda. After the defeat of President Ford in 1976, he saw the Republican Party as desperately in need of a new economic policy. It was clear, Kristol thought, “that the Republican Party would have to become more than the party of a balanced budget if it was to be invigorated.”

As he was thinking about what this new economic policy might be, Kristol came in contact with Jude Wanniski, then an editorial writer for the Wall Street Journal, who was intrigued by some new ideas about tax cutting advocated by economists Arthur Laffer and Robert Mundell. Laffer and Mundell argued that tax reductions were the key to overcoming stagflation, the combination of inflation and stagnation that plagued the economy of the 1970s.

Even before he absorbed the substance of what came to be called supply-side economics, Kristol quickly grasped its political potential: “I was not certain of its economic merits but quickly saw its political possibilities,” he wrote. “To refocus Republican conservative thought on the economics of growth rather than simply on the economics of stability seemed to me very promising. Republican economics was then in truth a dismal science, explaining to the populace, parent-like, why the good things in life that they wanted were all too expensive.... Supply-side economics, in one version or another, offered neoconservatism an economic approach that promised steady economic growth -- a sine qua non for the survival of a modern democracy.”

When California’s Proposition 13 came along in 1978, Kristol saw another way in which tax cutting was useful. By denying government its fuel, tax cuts forced politicians to cut spending. In this sense, supply-side economics echoed the thinking of conservative economist Milton Friedman, who wrote in a 1978 column that “the only effective way to restrain government spending is by limiting government’s explicit tax revenue -- just as a limited income is the only effective restraint on any individual’s or family’s spending.”

Kristol became an evangelist for supply-side economics, writing innumerable Wall Street Journal columns on the topic and publishing supply-siders like Wanniski and Paul Craig Roberts in his own journal, the Public Interest. His writings were paramount in convincing mainstream conservative economists like Herb Stein and Alan Greenspan to give supply-side economics a chance, despite their misgivings about cutting taxes without cutting spending at the same time. They, in turn, made it possible for Reagan to run on a supply-side platform in 1980 without being forced to explain how he would cut spending to pay for his tax cut.

Some now view Kristol’s support for supply-side theories -- still frequently denounced as “voodoo economics” -- as cynical, claiming it was nothing but smoke and mirrors, a trick to get Republicans elected. Such a charge is unfair. All major shifts in economic theory have owed their success to political factors. Classical economics succeeded in part because it was more compatible with democracy than mercantilism. Keynesian economics triumphed largely because it supported liberal ideas about government in the 1930s. After all, what value is any economic theory if it doesn’t help guide and support economic policy? And how can policy change without politics?

Starving the beast and increasing incentives for work, saving and investment are still good reasons to cut taxes today. They have a sound theoretical underpinning, unlike some White House arguments -- like the one that eliminating taxes on dividends will create jobs. There are good reasons to eliminate taxes on dividends, but creating jobs is not one of them.

Bush should spend some time reading Reagan’s old speeches and talking to neoconservatives about economics as well as foreign policy. From them, he might find ways of explaining and justifying his economic policies that will be better both for him and for the country.