In America, you really can have it all -- as far as tax plans go, that is.

Photographer: Alex Wong/Getty Images

A Tax Plan Republicans Should Learn to Love

Ramesh Ponnuru is a Bloomberg View columnist. He is a senior editor of National Review and the author of “The Party of Death: The Democrats, the Media, the Courts, and the Disregard for Human Life.”
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Senators Mike Lee and Marco Rubio have come up with the most pro-growth tax reform since Calvin Coolidge's presidency. That's a point that could easily get lost in the intra-party debate over their plan -- a debate that could shape the next presidential race and influence conservative policy for years to come.

Some news coverage has treated this debate as a struggle between "supply-siders" and other conservatives. That's a mistake. Both sides consider themselves supply-siders. Both sides, that is, believe that tax rates affect the amount of labor and capital supplied to an economy. They think lower tax rates would improve incentives to work, save and invest, and thus promote long-term economic growth.

Republicans sometimes exaggerate these effects. Some of them have suggested, much too optimistically, that cutting tax rates would boost growth so fast that it would generate higher revenue in short order. Some predict economic doom whenever tax rates rise. It's not necessary to adopt such views, however, to agree that lower rates are well worth seeking.

But historically, supply-side reforms have proceeded in tandem with other changes to the tax code that weren't directed solely at increasing economic growth. President Ronald Reagan's 1981 tax cuts, for example, were partly intended to prevent "bracket creep." In that era, inflation was pushing middle-class Americans into higher tax brackets even when their real incomes were flat. Reagan ended that. Supply-side theory would have said that accepting bracket creep and using the extra revenue it produced to bring the top tax rate down further would have done more to promote growth. But Republicans of the day chose to couple supply-side reforms with middle-class tax relief.

Lee and Rubio are continuing that tradition today. They're set to propose a reform that would cut tax rates on income, business investment, capital gains, dividends and estates. It's a supply-side wish list. Even so, it's controversial among supply-siders because it also expands the child tax credit. The senators think a bigger child credit is needed to correct for the way the federal government overtaxes parents.

Press accounts of the Republican debate have said that the child credit is controversial among conservatives because it is “targeted” rather than “broad-based.” That too is a mistake: The enlarged child credit would benefit more people every year than the capital-gains tax cut that all supply-siders favor. But the critics are right to say that it's designed to provide tax relief, especially for middle-class families, and not to boost economic growth.

That criticism has overshadowed the many pro-growth elements of the plan. It would produce a tax code similar to what resulted from the last big round of reform, in 1986, but with two big differences: It would have somewhat higher rates and much better treatment of investment. That's a tradeoff supply-siders should be happy with. It would make for a tax code that does more to encourage growth than any the U.S. has had since the 1920s.

Pro-growth purists could rightly point out that the reform would do even more to improve economic incentives if it junked the child credit and used the revenue to bring rates down further. But that would also be a less politically viable plan, just as Reagan's tax cut would have been less politically viable had it been solely concerned with higher growth.

A potential drawback to the Lee-Rubio plan -- which will surely draw headlines as Rubio gears up to run for president -- is that it swells the deficit. An earlier version that Lee introduced was found to reduce revenue significantly. Given the long-term debt projections the country faces, a reduction in revenue would need to be accompanied by spending reductions. (Both Rubio and Lee, to their credit, have favored serious restraint in entitlement spending.) Or the plan would have to be revised.

But we're several years away from anything like this plan becoming law. In the interim, it could help set a direction for conservative tax policy and for Republicans seeking the White House. It's more important as a statement about tax structure than one about tax levels. It says that conservatives should seek both lower tax rates and middle-class tax relief. That's always been the winning supply-side formula.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Ramesh Ponnuru at rponnuru@bloomberg.net

To contact the editor on this story:
Timothy Lavin at tlavin1@bloomberg.net