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Which Party Has a Tax Problem?

The media say Republicans, but it’s actually the Democrats.

Jul 4, 2011, Vol. 16, No. 40 • By JAMES PETHOKOUKIS
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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?”

Shooting themselves in the foot

Gary Locke

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.

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