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Hey, Republicans! Push Deregulation, Not Tax Cuts

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Republican candidates for president like Jeb Bush really need to try something different from the idea that tax cuts fix everything. 

This isn't to say that there is nothing to like in Bush's recently released tax policy plan. It lowers the corporate tax, which economists believe is especially distortionary. It eliminates the favorable tax treatment of debt versus equity in finance, which is in keeping with our emerging understanding that debt bubbles are more dangerous than equity bubbles. It closes loopholes on itemized deductions. It expands incentives for business investment, and makes a few other useful tweaks. 

But the mainstay of the plan -- the element that has grabbed the headlines -- is tax cuts. Bush wants to slash the top marginal tax rate to 28 percent, lower than it has been except for a couple of years in the late 1980s. He also wants to eliminate the estate tax. It's all pretty reminiscent of his brother's plan from 15 years ago. 

But recent U.S. history isn't very encouraging when it comes to the effect of tax cuts on growth. Economic theory says that tax cuts are subject to diminishing returns. The huge reduction in tax rates under President John F. Kennedy produced a burst of growth. Ronald Reagan's additional cuts provided a more modest boost. But George W. Bush's tax cuts of the early 2000s were a big flop. Growth during the early 2000s was anemic compared with previous booms, and the federal budget swung from surplus to deficit. 

Meanwhile, Republicans seem capable only of reiterating that tax cuts will pay for themselves by producing more growth and no loss of tax revenue. This is a proposition that almost no credible economists believe in

In other words, the tax cuts Bush wants would, at best, give us only a little growth while costing a lot in red ink. Bush’s plan is estimated to cost about $3.4 trillion during the next decade, and supply-side magic is likely to defray very little of that cost. 

If I may, I would like to suggest a different approach. Republicans should stop focusing so much on taxes and devote more attention to deregulation. 

Deregulation is one of the traditional mainstays of the neoliberal approach to economic policy -- the others being free trade, tax cuts and low government spending. But in the past, Republicans haven't made it a top priority. William Niskanen, one of the architects of Reagan's economic policy program, writes: 

The reduction in economic regulation that started in the Carter administration continued, but at a slower rate...Deregulation was clearly the lowest priority among the major elements of the Reagan economic program.

Reagan was certainly no friend of regulation, as evidenced by the slow growth of the Federal Register, where rules and regulations are recorded, during his presidency. But most of the big deregulation that ushered in the current neoliberal age happened under Jimmy Carter, or under earlier presidents. 

Perhaps Republicans can think about filling this gap in their policy agenda. Although it's very difficult to measure the amount of regulation across the economy, there are more and more areas that are cause for concern. 

For example, the scope of occupational licensing, which economists mostly believe is a drag on growth, is startling, and seems to have no good reason behind it. The Barack Obama administration has actually started to address the issue, stealing a march on conservatives. If Republicans want to depict themselves as the real deregulators, they might want to try taking up this issue. 

Another concern is environmental regulation that blocks the development of infrastructure. Although some environmental regulations are necessary -- you want to keep breathing clean air, right? -- local development opponents are often able to use costly environmental reviews to block needed infrastructure. 

A third area is zoning. As the incentives for density have risen, zoning regulation has become an increasing burden on growth. It might be time for the federal government to step in and encourage localities to relax their land use policies. 

A fourth worry is the Food and Drug Administration. George Mason University economist Alex Tabarrok has argued that the FDA needs to overhaul and streamline the process it uses to approve critical new drugs and medical devices. 

A fifth area is the Sarbanes-Oxley Act. The decline in publicly listed companies on U.S. exchanges and initial public offerings is disturbing. Though there is some evidence that the law wasn't responsible for all the reduction, many believe that it is one culprit, and should be reformed. 

These are certainly not the only areas where regulation might be a drag on growth, and indeed some Republicans have cited the regulatory burden as problematic. The difficulty with regulation is that it isn't any one issue, but a vast array of different issues, each with its own cost-benefit analysis. But any healthy economic system will strike a balance between regulation and deregulation, and that requires some policy makers to fight on the side of deregulation. 

The Republican Party has chosen to leave that job to the Democrats on many occasions during the past few decades. If the Republican Party took up the mantle of deregulation it might be more productive than trotting out the old tax-cut dogma. And it might hold the promise of doing more for economic growth.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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