The Patriot Post® · Tax Cuts: A Reappraisal

“I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” —Milton Friedman

These words by the sagacious Milton Friedman were once my guiding light when thinking about fiscal policy. Having studied the impacts of Calvin Coolidge’s tax cuts and Ronald Reagan’s tax cuts, I had been sold on a policy prescription that appeared to only have benefits and no harm. But as I have matured politically and come to understand that the 2020s are not the 1920s or the 1980s, I believe it is time for conservative dogma surrounding this long-celebrated policy to be reassessed.

A Success Story

In the 1920s and 1980s, before conservative stalwarts like Coolidge and Reagan took the presidency, the highest marginal tax rates were 70% and higher. Success was met with a punitive tax policy that embodied a pernicious kind of class warfare. When Coolidge and Reagan slashed tax rates to below 30%, markets soared, standards of living rose, and cash filled the government’s coffers. With such glowing results from these tax cuts, one might believe they are a policy fit for any time, anywhere. I for sure thought this. However, as I have gained a deeper sense of the United States’s problems, I have noticed that burdensome tax rates are no longer in the top 10, and they should not be the first thing a conservative tackles when taking control of Congress or the presidency.

The Trump Tax Cuts

A great place to start when understanding the futility of tax cuts today is with the Tax Cut and Jobs Act (TCJA) passed by Donald Trump in 2017. This policy was sold to the American people as a “middle class tax cut,” but this was not quite the truth.

First, over 40% of Americans do not even pay federal income taxes. This means that a sizable portion of the electorate has very little stake in the reduction of top tax bracket rates. A common retort to this is that the increase in the child tax credit that came with the TCJA served as a tax cut for low-income families. However, increases in the child tax credit do not serve the pro-growth end of tax cuts. To put it in crude terms, the child tax credit is essentially a new welfare program that has unfortunately garnered bipartisan support.

For a tax cut to truly be pro-growth, it must slash rates for the highest income earners and/or corporations. This is why the reduction in the corporate tax rate from the TCJA was the centerpiece of Trump’s tax reform. This reform led to over $1 trillion being repatriated from overseas and stimulated investment. While this reform certainly had positive economic impacts, it did little to give the little guy a leg up in the globalized economy. This is why nationwide polls revealed the TCJA to be incredibly unpopular with the American people, bringing me to my second point — the political legweights that tax cuts have become.

Political Ignorance

When Ronald Reagan swept the nation with two landslide victories, it was clear that tax cuts were a political winner. But the electorate’s embrace of this policy was a product of the 1970s and 1980s political climate. The economically ignorant policies of what Arthur Laffer calls the Three Stooges — Richard Nixon, Gerald Ford, and Jimmy Carter — combined with a uniting spirit of anti-communism cultivated an environment where pro-growth tax policies were a political winner.

The Reagan Democrats understood that the anti-capitalist policies of the past were hurting them and that only through a revitalization of the free market could their well-being increase. Fast-forward 40 years, and the cultural and economic landscape is completely different: income inequality is at an all-time high, 50 years of relentless immigration has held down wages, and wealthy corporations hold Middle American traditional values in contempt.

Now, I am not one who claims wealth inequality is the root of all evils, but this reality of discontent should not be ignored.

Rather than being seen as a policy that creates a tide that lifts all boats, cutting taxes is now viewed as a giveaway to wealthy individuals and corporations that despise the lower classes. This can be seen in the polling of the TCJA — less than 30% of Americans thought it was a good idea. Aside from their political unpopularity, tax cuts are also no longer prudent, given the massive debt our nation has accumulated.

Gambling Our Children’s Future

Every time a tax cut is pushed, our leaders tell us it will pay for itself through economic growth that increases the tax base and consequently offsets any potential decreases in revenue. The idea that a tax cut will pay for itself comes from the great economist Arthur Laffer. The Laffer Curve puts in a graphical form what is easily intuited: that a tax rate of 100% and one of 0% would both collect $0 in revenue and that the revenue-optimizing point is the maximum point of a parabolic curve defined between a rate of 0% and 100%.

Laffer was not wrong when he postulated that decreasing marginal tax rates would increase revenue by increasing the incentive to produce and decreasing the incentive to store wealth in unproductive assets like tax-exempt municipal bonds. But the Laffer Curve is called a curve for a reason: Once the peak of the curve has been reached, subsequent tax cuts will not increase revenue but rather decrease it. Laffer’s analysis was correct when assessing the tax cuts of Coolidge, Kennedy, and Reagan, but that was when taxes were being cut from the revenue-prohibitive range of 70% — now, the top marginal rate is 37%. While we do not know the precise rate at which revenue is maximized, it is more likely than not that it has already been reached, and future tax cuts are sure to increase the deficit.

The deficit-increasing consequence of future tax cuts actually means that tax cuts are not truly tax cuts. Rather, they are a redistribution of taxation today to the taxation of our children and grandchildren. A Hoover Institute economist described this quite succinctly, saying, “Unless spending is altered, borrowing today is just implying future taxation.” When one looks at the issue this way, spending reductions today are the real way to cut taxes.

Furthermore, the increased borrowing resulting from tax cuts puts proponents of such cuts in the camp of the Keynesians, whom conservatives have spent decades rebuking. It is a Keynesian idea that borrowing today stimulates economic growth tomorrow. Such a position is not one that any self-proclaimed conservative should take — leave it to the leftists to make fiscally unsound policies.

Looking Ahead

The 21st century brings new challenges for conservatives to tackle. American Patriots look around and see the spread of toxic racialist ideas, the hypersexualization of society, the decline of the family, mass immigration, and rampant materialism. Tackling each of these issues is of greater importance than cutting marginal tax rates for the wealthy — a group of people that has collectively stood by and cheered on the moral rot that consumes America.

If Milton Friedman were around today, I think he would agree with me.

How can we undo the Great Society, the New Deal, or ObamaCare when so many of our countrymen no longer understand the Constitution or cherish the ideas that made America so great? Reviving civic values and replacing our culture of instant gratification with one of restraint and discipline is the challenge of our day, and it is time to meet it.