Obama kept middle-class tax rates near the floor.

Photographer: Bill Pugliano/Getty Images

Tax Cuts Can't Motivate the Republican Base Anymore

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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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:

Everyone got a tax cut, averaging 4.4 percent of their income. But the biggest cuts, 6.3 percent to 7.7 percent, went to the middle three quintiles. The affluent-but-not-startlingly-rich got the least, because they couldn’t shelter income the way richer people could, and the lowest quintile got the second least, because they didn’t pay much in tax to begin with.

Wait -- I know what you’re going to say. “What about payroll tax?” This includes payroll tax. It includes everything -- income, federal, and the quintile’s share of taxes that aren’t levied directly on them, like corporate and excise taxes (which ultimately have to be paid by some person, whether that person is a shareholder, vendor, or employee). At this point, taxes are simply a much more negligible part of the expenses in most people's lives.

And even if we look at the most visible taxes, we simply don’t see a population groaning under the lash of the IRS. Here’s what happened to income taxes in the same period.

And also ...

Except in the lowest quintile, no one is paying significantly higher effective payroll taxes -- and for those people, the higher payroll tax has been offset by the earned income tax credit, and higher in-kind benefits from the government, such as Medicare and Medicaid.

Unless you’re planning to touch payroll taxes -- and if you do, how are you going to pay for Social Security? -- it’s going to be very hard to get those bottom three or four quintiles interested in your tax reform, because their income taxes are already negligible. And since that group has 80 percent of the people in the country, that means it’s going to be very hard to get elected on a platform of tax cuts.

You can see this in the polls. The number of people who think their taxes are too high has fallen dramatically since Bush enacted his tax cuts. It’s still 50 percent of the country, to be sure -- since when have people wanted to pay more taxes? But only 1 percent of the country cites this as their top economic issue, and only 5 percent of families cite taxes as their biggest financial problem. It’s pretty easy to guess which quintile that 5 percent falls into. And at that, many of those people may be thinking of property taxes, or state and local taxes, over which a Republican president would have no control.

There is simply no way to make federal tax cuts add up to a winning strategy in this day and age. It’s great for the donor base and the think tanks. But it’s going to fall on deaf ears among the voters, who just don’t care that much. Even people who are ideologically committed to tax cuts, regardless of the effect on their own wallets, are probably less likely to get excited and go out and vote on the issue when it means so little to their own personal lives.

Moreover, Republicans now have the same problem that Democrats and Republican New-Deal-Lite types had in 1979: they’ve delivered on the tax cuts, and the tax cuts did not deliver on the fabulous promises of economic growth. You might be able to get people to go along with your low tax plan if you could credibly claim it was going to deliver a lot of stable, high-paying jobs. But even if you think that it actually will (my own belief is that lower taxes do improve economic growth in the long term, though not enough to make the tax cuts pay for themselves), the "low tax" brand is too tarnished to convincingly sell it to enough average voters.

That doesn’t mean that people hate tax cuts, the way they hated taxes in the 1970s. After all, they were paying high taxes in the 1970s; these days, they aren’t. It's just not that motivating an issue any more. And because the federal system is already so progressive, any plausible reform is going to get scored by the Congressional Budget Office as delivering the lion’s share of its benefits to the wealthy, which will further impress upon them the irrelevance of the Republican platform to their own lives.

So Republicans may well be able to have tax cuts as an add-on to other things that actually promise benefits to that vast middle swathe of voters. But it can’t be the entrée, much less the whole meal.

Unfortunately, even as reformocons try to stock the pantry with more appetizing fare for the ordinary diner, the politicians keep hauling out the same stale stuff they’ve been offering for 30 years. They shouldn’t be surprised when the voters pull out their phones and start searching for other dining options in the area.

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

To contact the author of this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net