Symposium | First Principles: Arguing the Economy

The Triumph of Taxophobia

By Jonathan Chait

Tagged conservatismEconomicsTaxes

The conservative movement’s embrace of taxophobia is probably the most important development in American political life over the last three decades. It is the one quality that most distinguishes American conservative elites from conservative elites in other countries. They’re more likely to question climate science, more sanguine about people dying for lack of health insurance, and less xenophobic (which is rather nice). But above all—far above all—they hate taxes.

Taxophobia has spawned an epistemology of its own and has completely reshaped the landscape of American politics. It more than anything else has driven the widely decried rise in partisan conflict. More profoundly, conservative taxophobia has redefined the terms of the political debate. Two generations ago, economic liberalism meant Keynesian deficit spending and a rapidly expanding welfare state with little concern for deficits. Fiscal conservatism meant opposition to deficits and inflation. Today, the old fiscal conservatism has been embraced by the mainstream of the Democratic Party. The old fiscal liberalism has been confined to the margins, espoused by left-wing dissidents to the Democratic mainstream. And the Republican Party inhabits an otherworldly new realm that even the staunchest right-wingers of a generation before could scarcely have imagined. As the two parties trade power back and forth, the ideological basis for economic policy pingpongs between the old right and a loopy kind of far-right. Periods of Republican governance have grown increasingly disastrous, while periods of Democratic governance are largely consumed with staving off fiscal collapse.

How did this happen? All conservatives, and many liberals, explain this transformation as the story of the rise of a new idea. But I don’t think that’s right. As I will explain, ideas only serve to rationalize political and economic self-interest. However, the story does begin with a new idea.

The Birth of a Notion

In the mid-1970s, the new doctrine of supply-side economics suddenly emerged on the right. The doctrine took what had been a marginal notion within the economics profession—the idea that higher tax rates can dampen the incentive to work and innovate—and elevated it to something close to a religion. The supply-side creed held that tax rates, especially on the rich, had enormous effects on economic growth. It was even possible, the supply-siders famously promised, that tax cuts could unleash so much economic growth that the net effect would increase tax revenue.

Jude Wanniski, a Wall Street Journal editorial writer who did more than anybody else to formulate and spread the new doctrine, spoke of the new creed in quasi-religious terms, as did many of his adherents. “It was Jude who introduced me to Jack Kemp, a young congressman and recent convert,” recalled Irving Kristol, who helped spread the gospel of supply-side economics. “It was Jack Kemp who, almost single-handed, converted Ronald Reagan.”

We can identify three phases of supply-side craziness in Republican Party history. In phase one, the Republican establishment greeted supply-side economics with incredulity. The messianism and insouciant disregard for sound fiscal principles sounded more like a nutty left-wing scheme than anything a Dwight Eisenhower or even a Barry Goldwater might recognize. George H.W. Bush called it “voodoo economics.” A great blaze of tax cutting at the outset of the Reagan presidency quickly produced massive deficits, and the Reagan Administration—still dominated by an older generation of Republicans—quickly retrenched. It quietly raised taxes in 1982 and 1983, and then in 1986—aghast at the massive corporate tax loopholes that had grown out of its initial tax cuts—agreed to a tax reform that, even in the course of lowering nominal rates, shifted a larger share of the tax burden onto the rich by sweeping the tax code of subsidies for the wealthy.

Through the next decade, in phase two, the Republican Party stayed committed to anti-tax absolutism in rhetoric, but it remained largely tethered to fiscal reality in practice. In 1990, George H.W. Bush agreed to a major deficit-reduction package, including substantial spending cuts, in return for a small hike in the top marginal income tax rate, from 28 to 31 percent.

This turned out to be the last gasp of old-fashioned Republican fiscal conservatism. Conservatives in the House, led by Newt Gingrich, revolted, and Republicans wound up opposing their own president’s budget deal by a 163-10 margin (it passed thanks to overwhelming Democratic support). They called the deal “the fiscal equivalent of Yalta.” Bush was a traitor; his budget director, Richard Darman, became “the party’s untouchable,” as one reporter later put it. Conservatives decided never to allow such heresy again, and indeed they never have.

Which brings us to phase three. Over the last 20 years, the penetration of taxophobia within the Republican Party has been total. Reducing taxes, especially taxes on the rich, has been enshrined as the party’s unquestioned central policy goal. Virtually all Republicans at the national level have signed a pledge concocted by anti-tax fanatic Grover Norquist pledging never, under any circumstances, to support higher taxes. No such pledge exists for spending.

In 1996, Bob Dole, who had once spoken contemptuously of the supply-siders, picked Kemp himself as his running mate and made a tax cut the centerpiece of his campaign. The George W. Bush Administration poured every ounce of its political capital into reducing taxes, which it did in 2001 and 2003. In 2008, every Republican presidential candidate asserted (wrongly) that the Bush tax cuts increased tax revenue. Upon taking control of the House this year, Republicans immediately dismantled a rule, first imposed as part of the 1990 deficit deal, requiring that any entitlement increase or tax cut be matched by tax hikes or entitlement cuts. The rule had been effective at restraining spending—but it got in the way of tax cuts.

Discredited, but Immortal

All this pertinacious devotion, despite the plain fact that there are very few ideas that have failed as unequivocally as supply-side economics has failed. Supply-siders like writer George Gilder predicted that Reagan’s tax cut would “generate enough new revenue to eliminate the deficit or reduce it to manageable size.” This proved staggeringly wrong, and, as noted above, the Reagan Administration recognized the wrongness almost immediately. In 1993, supply-siders (including virtually the whole Republican Party) predicted that President Clinton’s tax hike on the rich would induce a recession and cause revenue to decline. Instead, the economy boomed and revenue exploded.

When Bush cut taxes in 2001, supply-siders insisted that revenue would fall much less than conventional economists predicted. Harvard economist and occasional Republican adviser Martin Feldstein argued, “The true cost of reducing the tax rates is likely to be substantially smaller than the costs projected in the official estimates.” Conservative talking head and also occasional Republican adviser Lawrence Kudlow predicted, “Future surpluses will rise, not fall.” In fact, tax revenues collapsed. Moreover, the economy’s performance since Bush cut taxes has ranged from disappointing to disastrous, an outcome that has once again undermined the supply-side belief that low tax rates hold the key to economic growth.

And yet, as three decades of economic and budgetary data have repudiated supply-side belief time and again, its hold on the Republican Party has only strengthened. Robert Bartley, the late Wall Street Journal editorial page editor and fervent supply-side champion, once wrote, “Economists still ridicule the Laffer Curve, but policymakers pay it careful heed.” He meant this as a boast. Political support for supply-side economics appears completely impervious to data. If it were a person, it would be Bill Murray in Groundhog Day. “I have been stabbed, shot, poisoned, frozen, hung, electrocuted, and burned,” he boasted, “and every morning I wake up without a scratch on me, not a dent in the fender. I am an immortal.”

Moral Disgust at Redistribution

As you may have surmised, the political success of taxophobia has little to do with the intellectual merits of the supply-side idea. One clue about the marginal role of the idea is that, from the very outset, advocates of supply-side policies relied on a second rationale that is not only different from the logic of supply-side economics but mutually exclusive. This argument is known as “starve the beast.”

Unlike supply-side economics, starve the beast concedes that tax cuts reduce revenue, but insists that the reduction of revenue automatically produces a decrease in expenditures. Reagan offered this argument himself in a 1981 budget address. “[T]here were always those who told us that taxes couldn’t be cut until spending was reduced,” he asserted. “Well, you know, we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance by simply reducing their allowance.” In 2001, coming off the longest economic expansion in American history, Republicans soft-pedaled supply-side claims about reducing the disincentive to growth, and relied more heavily on “starve the beast” justifications for tax-cutting. George W. Bush and other Republicans insisted repeatedly that, if the budget surplus were not dissipated as tax cuts, “it would get spent,” as if automatically.

Starve the beast is not an economic doctrine, or even a pseudo-economic doctrine, but merely an aphorism. Unlike supply-side economics, conservatives did not invest vast sums into legitimizing starve the beast as an actual theory. Those studies that have attempted to evaluate it have instead proven the opposite: Lower revenues have resulted in higher, not lower, spending. That result, of course, is easy to see with the naked eye. The tax hikes of 1990 and 1993 inaugurated a period of generalized fiscal restraint, in which revenue climbed and expenditure fell. The George W. Bush era smashed through the bulwarks of fiscal restraint established by the previous two presidents, resulting in falling tax revenue and dramatically higher spending.

Starve the beast failed in ways that even its proponents concede. Supply-siders still try to explain away Reagan’s deficits, the Clinton boom, and the Bush bust. Yet nobody even bothers to deny the failure of Bush’s starve-the-beast policies. Hardly a day goes by without conservatives lamenting that failure. The Bush Administration began with Republicans arguing that tax cuts were needed to prevent an explosion of spending. It ended with Republicans lamenting an explosion of spending, but vowing to maintain the policies whose stated rationale was to prevent that spending explosion.

When you see a party shifting between two mutually exclusive arguments for a policy, each of which fails spectacularly and repeatedly, you have to look for other reasons behind the policy other than the stated rationale.

One such rationale for supply-side’s pioneers was simple self-interest. In abandoning its traditional fiscal conservatism for tax-cutting, the GOP could now be offering goodies to voters rather than taking them away. Irving Kristol, who published Wanniski’s most influential essay in The Public Interest, later admitted in a memoir, “political effectiveness was the priority, not the accounting deficiencies of government.”

Yet political opportunism, too, only goes so far as an explanation. While people like tax cuts, they like other deficit-increasing policies—especially higher Social Security and Medicare benefits—even more. After leaving the Bush Administration, disgruntled Treasury Secretary Paul O’Neill published his assigned talking points for the 2001 tax-cut debate. One frankly conceded, “The public prefers spending on things like health care and education over cutting taxes. It’s crucial that your remarks make clear that there is no trade-off here.” Moreover, tax cuts for the rich tend to lack public support altogether. If mere vote-chasing were all that lay behind Republican tax-cut mania, you’d expect the party to embrace more broad-based tax cuts, as opposed to the sharply regressive tax cuts that lavish a majority of the benefit upon a small fraction of the populace.

There is one idea that explains Republican behavior: moral disgust at income redistribution. Since it doesn’t poll well, this is not an idea that you often find expressed in talking points or in other means of public persuasion. But occasionally this sentiment pops up in the form of a kind of raw royalism, usually from conservatives who don’t have to run for office. Former Bush economist Greg Mankiw endorses the belief that free markets are a flawless arbiter of income distribution. Republicans, he writes, believe that “in a free society, people make money when they produce goods and services that others value, and that, as a result, what they earn is rightfully theirs.” Adds American Enterprise Institute President Arthur Brooks, “[I]t is a moral issue to confiscate more income from the minority simply because the government can.”

When Republican elected officials pay fealty to these ideas, it is usually through oblique references. They often bemoan the fact that nearly half of all taxpayers pay no income tax (which ignores the burdens of federal payroll taxes) or that the top 1 percent is paying a rising share of the tax burden (which is true, but only because the top 1 percent is earning a higher share of the income). The underlying sentiment is that the practice of levying higher tax rates upon the rich amounts to an oppressive form of discrimination—democracy as mob rule. Conservatism’s commitment to flattening the tax code, so inexplicable to those outside the movement, is an inviolable principle within. And the necessity of keeping the core reason secret only adds to its moral urgency—so oppressed are the rich that those who seek to relieve their oppression dare not even speak openly.

This state of affairs helps explain the increasingly bitter partisanship of the American political debate. Opposition to the progressive income tax is at once a sacred and a hidden value for Republicans, and thus one that makes compromise nearly impossible. You cannot bargain with a partner whose stated goals are merely pretexts. A slow economy proves that tax cuts are needed, or a prosperous economy shows that tax cuts are affordable, or tax cuts will reduce the deficit by increasing revenue, or tax cuts will reduce the deficit by starving government of revenue. Vast swaths of public discourse are couched in nonsense.

Not long ago, House Budget Committee Chairman Paul Ryan—who enjoys unparalleled prestige on budget issues among conservatives of all stripes—railed against the deficit and was asked about the massive cost of extending tax cuts. He replied, “Keeping tax rates where they are, and preventing them from going up, is not spending, because that is people’s money in the first place.” What on earth could this mean? Here is the answer. Ryan has declared his deep intellectual debt to Ayn Rand. He required all his staffers to read her work. When he responds to a question rooted in simple accounting with a moral claim (“people’s money in the first place”), he is saying that the arithmetic of revenue, outlays, and deficits does not matter to him. None of the pecuniary issues that he claims to care about so deeply ultimately matter. He is fighting a class war, which he views as a war for freedom itself.

Rand’s passion and hate flowered in a postwar world in which the working classes were slowly drawing closer with the upper classes. The great irony of the recent triumph of her vision on the right is that it takes place in conditions just the opposite. The poor and working classes have languished for decades, while the rich pull in unimaginable sums. This is the atmosphere that has paradoxically given rise to the right’s fervid class warfare.

The upside, if you can call it that, is that the taxophobic mania of the right has created a unity that otherwise would not exist on the left. Liberals do not agree on the solution to an economy in which the vast majority see their incomes stagnate while a tiny few enjoy nearly all the gains. But opposition to the right’s boundless determination to make the situation worse can be the lodestar.

From the Symposium

First Principles: Arguing the Economy

No debate is more fundamental in politics than economics. Its the sun; everything else revolves around it. This debate has never been more important than it is today. As the economy slowly rouses itself from its long slumber, its vital...

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Jonathan Chait is a senior editor at The New Republic.

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