The GOP should become the Party of Math
Surprise, surprise: Republicans don't like President Obama's new budget blueprint, particularly its $1.5 trillion in tax increases.
The GOP-controlled Congress will surely offer an alternative tax reform plan. So too, eventually, will the many GOP presidential candidates. Republicans believe the tax code matters — a lot — to the American economy's growth potential. This is the classic GOP argument: The lower top tax rates are, the faster the economy grows — and the richer everybody becomes. Sure, some will do better than others. But as Republicans like to say, echoing President John F. Kennedy in the 1960s, a rising tide lifts all boats.
Eventually, however, theory and metaphor must align with math. Policy must conform to economic reality. It must attempt to help solve or at least mitigate actual problems facing 21st century America. And two of the biggest problems are slow economic growth — at least by post-WWII standards — and stagnant middle-class incomes. And to these problems, the traditional Republican plan offers no real solutions.
Many members of the GOP coalition will put considerable pressure on Republican 2016ers to offer the same-old, same-old solution: Cut the top personal income tax rate and hope an economic boom makes everyone better off. It's already happening. Over at National Review Online, influential conservative thinker Amity Shlaes co-authored a lengthy piece attacking a tax reform plan from Senators Mike Lee and Marco Rubio, the latter of whom might make a White House bid. Lee and Rubio, much to Shlaes' dismay, only want to cut the top rate from 40 percent to 35 percent. Shlaes suggests 20 percent — the lowest rate since 1916 — would be a more aspirational target. Moreover, Lee and Rubio would greatly expand the federal child tax credit, giving direct tax relief to working parents, including those who pay payroll taxes but not incomes taxes. But to Shlaes, that's a huge waste of money better used to lower the top tax rate even further and "cause an explosion of growth."
Shlaes and other fantasy tax-plan advocates have a big problem: Their math doesn't work. First, the top tax rate has bounced up and down for more than 30 years, and growth has actually been faster when it's been on the higher side. Correlation and causality are tricky to prove with a big complicated beastie like the $17 trillion U.S. economy. But simply assuming a lower rate will create hypergrowth is a stretch. What's more, voters won't believe it either.
Second, it's hard to get faster — much less "explosive" — GDP growth these days, because America is getting older. An economy with slowing labor force growth needs higher productivity to generate the same output. And boosting productivity requires a lot more than just tax reform. Just returning long-term GDP growth to its postwar average would be a major accomplishment.
Third, even if cutting the top tax rate did boost growth, it might not help most households. The Federal Reserve reports that while the average pre-tax income for the wealthiest 10 percent of U.S. families rose from 2010 to 2013, there was little change for middle-class families. During that same period, real GDP rose by 9 percent. Automation and globalization may be decoupling middle-class living standards from GDP. Cranking up GDP growth is necessary for American prosperity, but not sufficient. Or as Paul Ryan puts it, "The wealthy are doing really well. They're practicing trickle-down economics now."
Fourth, even dynamic scoring probably won't make the budget numbers work for low-rate tax plans unless they also raise taxes on the middle class or cut entitlements. Back in 2012, Newt Gingrich had a 15 percent flat-tax plan that the Tax Policy Center scored as losing $1 trillion a year.
Fantasy economic plans based on ideological aspiration and Reagan-era nostalgia may be fun to talk about. But Republicans like to consider themselves hard-nosed realists who understand life is about trade-offs. They need to check their math.