Yesterday, in discussing the lower- and middle-class workers who have been increasingly displaced by automation and trade, I wrote that both parties are simply reiterating longstanding policy preferences that are far more geared to the desires of their respective elites, than to the difficulties these people encounter in their every day lives. In another column soon, I’ll talk about why the standard Democratic economic package is not making more inroads with this group. But today, I’m going to talk about why what the Republicans have been offering -- tax cuts and deregulation -- falls so flat.
I’ve been urging Republicans to find an agenda beyond tax cuts for a while, with no notable success. Mostly I’ve focused on the budget logic, which is simply this: we’ve run out of our ability to cut taxes without substantial cuts to entitlements, and the collapse of Bush’s Social Security reform illustrated that Republicans have absolutely no stomach for cutting entitlements.
But that’s boring fiscal nannying, easy for both parties to ignore as long as debt markets are still willing to lend the government money. So today let me point out why the political logic fails as completely as the budget math -- why the Trump voters, and indeed, Trump-hating social conservatives like Rod Dreher, are not much moved by Republican promises to get those marginal tax rates down even further.
To do so, I want to go back to a time when tax cuts did work politically, a period which starts with Ronald Reagan.
To be sure, tax cuts aren’t the only thing that brought Ronald Reagan into office. Crime and general public disorder played a role, as did the stagflation induced by the 1970s oil shocks. Reagan came into office after decades of politicians, Republican and Democrat, who had not merely compromised with the New Deal, but embraced and extended it; the main electoral question was simply how fast new additions would be rolled out. With the economy stagnant, and unemployment and inflation both high, the promise that the government could manage us into prosperity had begun to ring very hollow indeed.
But taxes certainly played a role. It wasn’t just the level of taxes, which was high; it was also how that level interacted with inflation.
Prior to the 1980s, tax brackets were not adjusted for inflation. So inflation would go up, reducing the purchasing power of workers. They’d try to earn more money. If they succeeded, they'd find themselves in a higher tax bracket. They weren’t actually richer; their new income could buy the same goods as, or perhaps even less than, they could buy before. But they were being taxed as if they’d joined the gentry.
In an era of double-digit inflation, this was a big problem, and it focused people intently on how much they hated their taxes. It also gave people the feeling that the government was going to go on taking more and more, while delivering less and less in the way of either public order or economic growth. That made people well down the income distribution very receptive to promises of tax cuts.
And for two decades, Republicans delivered them. First Reagan, then the second Bush dramatically lowered the amount that Americans pay -- all Americans, not just “the rich.” Along the way, they made the system more progressive, taking much more of its revenue from the wealthy (even though those people got a tax cut too, when the dust settled, they were paying a larger share of the government’s bills). Then Obama made the system even more progressive, by making the Bush tax cuts permanent for most people, while raising taxes on a small number of very high earners at the top.
Here’s the result: