Civil War on the Right (Part 1?)

I’ve got an old clip from the Wall Street Journal that quotes a Michigan legislator some years ago saying, “Some of our friends wanted it in the bill, some of our friends wanted it out, and Jerry and I are going to stick with our friends.”

That’s how I feel about a Wall Street Journal story this morning that lifts the lid on a growing split among conservatives that I’ve been observing up close for several months now over tax policy. “’Reformicons’ Put New Twist on Tax Debate” reports:

A group of young conservatives, dubbed “reformicons,” are making inroads among Republican presidential candidates by arguing the party’s traditional reliance on broad-based tax cuts, GOP orthodoxy for a generation, isn’t enough to cure middle-class woes.

Instead, they are calling for crafting subsidies, tax credits and other public-policy tools based on conservative philosophies and tastes to help the unemployed and other struggling middle-income households.

While it is unlikely any would-be Republican nominee would turn his back on tax cuts as a primary tool for encouraging growth, a few have been consulting with this crowd and incorporating their ideas into their thinking. Among them are former Florida Gov. Jeb Bush, Florida Sen. Marco Rubio and former Texas Gov. Rick Perry. . .

At the heart of their case is the notion that income-tax cuts would have a smaller impact than they did in the 1980s when the top rate was roughly double. Rising income inequality, stagnant wages for the middle class and stubborn long-term unemployment also mean the fruits of growth are going mainly to the top, an argument also made by Democratic thinkers.

The reformicon arguments on taxes are controversial within Republican policy circles, particularly among more established—and older—economists.

As that last sentence indicates, the problem here is that old timey supply-siders (one of whom I am which, to borrow the fractured syntax I once heard from a congressman on C-SPAN) think this approach is wrongheaded on several levels. Better to reduce deductions and exemptions and simplify the tax code rather than try to use it to “target” benefits at particular segments of the population. I have good friends on both sides of this intramural debate. And just like the quip I opened with, I’m going to stick with my friends.

I think the “reformicons” are correct that income tax rate reductions won’t have the same kind of effect they had in the 1980s for a lot of reasons—one of them being the absence of the high inflation that generated negative after-tax returns on investment in many cases—though we should reduce and reform the corporate income tax. (Once again Obama’s budget proposal displays his economic illiteracy: a short-term tax break on repatriating overseas profits will not lead businesses to invest capital on new operations here in the U.S. if the profits on those activities will be subsequently taxed at today’s highest-in-the-world rate.) But the critics are right to argue that playing with “targeted” tax cuts is playing the liberals’ game, and they will always outbid us when it comes to using the tax code to play favorites and dole out subsidies. In fact a few Democrats are already figuring this out, and proposing to steal the reformicons’ thunder.

The old-timey supply-siders emphasize more rapid growth as the best remedy for stagnant incomes, and while this view is mostly sound, I’m not sure it is politically potent. It is not clear, for example, that John F. Kennedy’s emphasis on faster economic growth helped him win the 1960 election (keep in mind that the 1960 Democratic platform called for a 5 percent growth rate—quite a contrast with today’s liberals, who are all about redistribution rather than growth; Kennedy’s specific income tax cut proposal didn’t come until after he was in the White House). Reagan’s income tax cuts in the 1980s benefitted everyone because high inflation was pushing everyone into higher tax brackets. Today, with past Republican-sponsored tax cuts having taken so many people off the income tax rolls (I hear the number is something like 47 percent!), further tax cuts don’t directly flow to many people, and the indirect benefits are too abstract to be compelling to working class voters whose incomes have been stuck for more than a decade.

This debate is just getting started, and may well culminate in a bitter platform fight in next year’s Republican convention. I remember the 1984 Republican convention, where there was a bitter fight on the tax plank over the placement of a comma (seriously). Next year could be much more divisive.