When a group of Republican senators recently voted to eliminate the $6 billion in tax subsidies handed out annually to the ethanol industry, hopes for a coming conservative crackup were thick in the air. Senator Chuck Schumer, the New York Democrat, immediately blasted out an email: “In Watershed Moment, 34 Senate Republicans Broke With Right Wing Ideology Yesterday—Vote Means Tax Expenditures Now Fair Game To Reduce Deficit.” Cable host Lawrence O’Donnell was positively gobsmacked. “This is the most dramatic development in Republican tax policy in the 21st century,” he declared. “Is this the first flicker of hope that the Republican tax cut fever might be fading?”
Less attention was devoted to the aftermath. Republicans later helped shelve the bill with the ethanol amendment when it didn’t include an offsetting measure to kill the death tax, thus avoiding a net tax increase. Americans for Tax Reform, a powerful antitax group, celebrated that its widely signed no-tax pledge remained inviolate. Next, Republican Senate boss Mitch McConnell said tax revenue increases were not going to be part of negotiations over raising the debt ceiling—and indeed, the talks seem to have broken up over that issue. Various versions of the oft-repeated talking point—“We have a spending problem, not a revenue problem”—were reiterated by Republican guests on Fox News Channel and talk radio. And good luck finding anyone on the right pushing hard for higher marginal tax rates.
Upon close examination, however, one can detect at least a slight wobble in the generational Republican and conservative opposition to tax hikes of any sort, for any reason, at any time. That’s significant. For more than two decades, Republicans have stayed stubbornly and successfully on message: no new taxes. But the deluge of debt that’s flowed from the Great Recession and President Barack Obama’s spendthrift response to the downturn may be causing a rejiggering of calculations.
For some, fear of a debt crisis outweighs the political and economic risks from higher taxes. Getting Democrats to agree to deep spending cuts is more important. Last December, three conservative GOP senators on Obama’s bipartisan debt commission—Tom Coburn, Mike Crapo, and Judd Gregg—voted to eliminate business tax breaks and scale down those for individuals. Part of the savings would be used to lower tax rates, but the rest—nearly $1 trillion over ten years—would go toward debt reduction.
Another data point: While Americans for Tax Reform helpfully reminded its pledge signers to balance the tax increase from eliminating those ethanol subsidies with a subsequent tax cut, the equally influential Club for Growth made no such demand or recommendation. “We are not the club against taxes, we are the Club for Growth,” says Chris Chocola, the group’s president. As he sees it, eliminating market-distorting subsidies is a good thing in and of itself. Chocola said his organization will judge other tax expenditures—there are currently more than $1 trillion worth embedded in the U.S. tax code—on a “case-by-case basis.”
Also note that Republicans who were negotiating with Vice President Joe Biden on a deal to raise the federal debt ceiling didn’t rule out a rather sneaky and technocratic way of boosting taxes. Income tax brackets and Social Security benefits are indexed to inflation. Many economists think the cost-of-living measures Uncle Sam currently uses tend to overstate price increases. Using a different type of index, one that takes into account how consumers change their shopping habits as prices rise, would slow inflation adjustments to the tax code. Savings over a decade could be as much as $300 billion.
Even some leading conservative wonks seem willing to consider the need for more tax revenue. The debt-obsessed Peter G. Peterson Foundation asked a bunch of Washington think tanks—including the American Enterprise Institute and the Heritage Foundation—to design budget plans putting America on a sustainable fiscal path. Heritage produced a plan well within the bounds of Republican economic orthodoxy of the past 30 years. It would balance the budget within a decade while instituting a flat tax that would keep tax revenue at 18.5 percent of GDP, roughly the historical average.
But AEI’s scholars created a plan that would boost tax revenue to a consistent 19.9 percent of GDP by replacing the income tax with a broad consumption tax and substituting a carbon tax for alternative energy subsidies. Only three years in U.S. history have seen higher tax levels as a share of output. The team’s explanation: “We cannot simply tax our way to a balanced budget without suffering the consequences of a -sluggish economy and reduced prosperity. We also cannot simply cut spending without risking the loss of essential services for an aging population, undercutting our infrastructure on which economic growth builds, and reducing our ability to defend the country against its enemies.”
So does all this amount to a schism on taxes or repudiation of an economic approach that brought the Republican party out of its post-World War II political wilderness and helped extend America’s global economic superiority into the 21st century? Not so much.
Actually, it’s Democrats who face dangerous fiscal fissures. Here’s why: Under an alternate financial forecast from the Congressional Budget Office—one more likely than its baseline prediction—spending as a share of the economy is headed toward 34 percent of GDP by 2035 versus 21 percent historically and 24 percent today. But the economy would never arrive at this point without being crushed under a monstrous tax and debt burden. The mainstream economic and political consensus—except among liberal Democrats, really—is that spending needs to be closer to 21 percent of GDP. The Obama commission would cap spending at that level, as would bipartisan plans fashioned by Senators Bob Corker, a Tennessee Republican, and Claire McCaskill, a Missouri Democrat.
The left hates this idea for two reasons. First, it means at least 85 percent of future debt reduction ultimately would come from cutting government. As it so happens, that 85-15 ratio of spending cuts to revenue increases is typical of the fiscal policy mix other countries have used to successfully escape from debt traps. Second, hitting that 21 percent mark would mean—perhaps—modest tax concessions from Republicans. Democrats, on the other hand, almost surely would need to agree to sweeping entitlement reform, probably along the lines advocated by Rep. Paul Ryan. The union-backed Economic Policy Institute, for instance, has a debt plan that puts spending at 28 percent of GDP by 2035 thanks to its embrace of a government-centric health system. At some point, Democrats will need to have an interesting internal conversation about whether a social safety net designed for the demographics of the 20th century is appropriate for this one.
What’s more, there’s every reason to believe that pro-growth policies can produce added tax revenue by making the U.S. economy bigger. The AEI plan, for instance, was required to use the gloomy economic forecasts of the CBO, which assume long-term GDP growth of around 2 percent. But many economists believe replacing the current income tax system with a more economically efficient consumption tax would boost long-run output. If growth were substantially higher than the CBO assumes, then the long-run revenue requirement to make the numbers work could be in the neighborhood of 19 percent of GDP—the same as in Ryan’s “Path to Prosperity.” But the pie would be bigger.
And there’s a lot more that can be done to increase growth beyond tax reform. The AEI plan, for instance, doesn’t touch on regulatory reform or increasing high-skilled immigration or implementing market-friendly approaches to infrastructure and basic research spending. All would boost tax revenue by boosting long-run GDP growth.
The prospect of modest tax hikes in exchange for radical entitlement reform is no reason for the American right to fracture. But with smart pro-growth policies, there would be no reason to raise taxes at all.
James Pethokoukis is a columnist for Reuters.