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The Ideological Underpinnings of the Tax Rate Debate

Long-time readers know that I’ve bemoaned the lack of distinction between the phrases “tax cuts” or “tax increases,” and “tax rate cuts” or increases, in policy discussion. For over a decade now, we’ve been arguing about the “Bush tax cuts,” as though anyone knows whether they were tax cuts or not. As I explained here almost four years ago:

When a politician says that he’s going to either cut or increase your taxes, he is engaging, wittingly or not, in a conceit and a deceit. He says it as though he has the power to do any such thing, when in fact he does not. He has no power except to reduce or increase the rate at which you pay taxes, whether on property, income, or whatever.

…When the “cost” of a tax rate reduction is “scored” by the Congressional Budget Office, they do a “static” analysis, which means that they assume that the change in rates will have no influence on the behavior of the taxed, which is arrant nonsense. When a politician tells you that he knows how much revenue a tax change will result in, he is either lying or deluded.

So the president is at least one of those two (and they’re not mutually exclusive), because he said in his press conference a few days ago:

It’s -- and, look, I’ve been living with this for a couple of years now. I know the math pretty well. And it’s -- it really is arithmetic. It’s not calculus.

Leaving aside that it’s unlikely that the president has ever even taken calculus, let alone passed or excelled in it (we won’t know unless he finally releases his college transcripts), yes, Mr. President, it actually is calculus, and not just arithmetic.

For those who don’t know, calculus is a field of mathematics that analyzes (among other things) rates of change, and their effects. It recognizes that some things are a function of other things, and that changing the former will have an effect on the latter, and quantifies it (to the degree that the nature of the function is understood). That is, it analyzes phenomena that are dynamic, rather than static. For instance, gravity is a function of distance from the earth’s center, and if one assumes it is, instead, a constant all the way up into space, it guarantees that your rocket design will not deliver the planned payload. Of course, the president has never been purported to be a rocket scientist (except figuratively by his acolytes and operatives with bylines).

Unfortunately, economics is much more complicated than rocketry, because unlike the nature of gravity, output as an effect of input is often hotly disputed within the profession. One of the areas of dispute is the effect of tax rates on revenue. As noted above, the Congressional Budget Office statically “scores” a Congressional tax proposal on the assumption that changing tax rates doesn’t change behavior, and that future economic growth is not a function of them. We can say one thing for sure about this assumption: it is economic nonsense. But for them to do anything else requires making other assumptions whose bases will be politically disputatious.

But the good news is that, at least temporarily, the discussion has gotten beyond the demagogic “(Bush) tax cuts” and “(Bush) tax increases” that we’ve been hearing for almost a dozen years now, and that never really existed in any quantifiable way, and finally explicitly turned to what it was always really about -- tax rates. And in so doing, it exposes the ideological underpinnings of the debate. On one side, we have the Republicans, whose primary concern is economic growth and debt/deficit reduction, and on the other, the Democrats, who seemingly lie awake at night worrying about income inequality. The big lie of the campaign was that the Republicans were opposed to increases in “revenues” (code word for soaking the rich), when the reality is that the Democrats don’t care as much about revenue as they do about “social justice,” as exemplified by the president’s Marxist remark during one of his primary debates in 2008 that he would increase the capital gains rate even if it reduced revenue, out of “fairness.” And so concerned is he about the debt, that he doesn’t even know how much it is.

Other redistributionists have gotten into the tax-rate game as well. Paul Krugman, mystifying (at least based on his behavior since winning it) Nobel Prize in Economics laureate and Marxist organ for the New York Times, says that we should go back to the 91% rate of the booming Eisenhower years, and the strong unions, as though anyone ever actually paid that rate, or that the boom was caused by it and union power, rather than resulted despite them. What he fails to propose, of course, is that we obliterate the industrial infrastructure of much of the rest of the world, as we had a decade earlier, which gave us a world market for our products with little foreign competition. As Victor Davis Hanson comments:

In such a landscape of postwar monopoly, the United States, which had not recovered before the war despite eight years of statist policies, could sustain, for a brief time, Krugman’s dream tonics of a top income tax rate of 91 percent (with plenty of loopholes) -- or almost any tonics within the broad parameters of free-market capitalism. Yet soon by the mid-1960s and 1970s, America reentered a competitive global economy, became increasingly dependent on soon-to-become-costly imported oil, and found its high-cost unionized labor, high taxes, and highly regulated 1950s economy inflexible and hardly able to adjust to the rise of dynamic competitors like Germany, Japan, South Korea, and later China. That is why the fossilized 1950s paradigm, which Krugman is nostalgic about, by the time of the Johnson, Nixon, Ford, and Carter administrations had stalled and was plagued with periodic bouts of high inflation, high unemployment, high interest rates, stagnant inner cities, a growing rust belt, and a generally stagflating economy.

It didn’t end until we got a president in 1980 who understood the wealth-generating power of reducing marginal tax rates. And note the missing president in that list: Democrat John Fitzgerald Kennedy. He, too, instituted tax-rate cuts, dropping Professor Krugman’s preferred 91% to 70%, and declared that “a rising tide lifts all boats.” And he would not recognize his party today, nor its members him, on either domestic or foreign policy. Barack Obama is not only no rocket scientist, but no Ronald Reagan, either. And sadly, in the end, neither was Mitt Romney, at least in his ability to display the common touch that gave Reagan two landslide victories.

Of course, in the other sense of the word, the current president’s real calculus is that he’ll be able to continue to wage class warfare, the economy will continue to be sick, he’ll continue to blame recalcitrant Republicans, and the media will help him in that endeavor. Given recent history, he’s unfortunately probably right.