Almost everyone is under-estimating what Republicans have just achieved in the fiscal cliff deal, including many Republicans who supported the deal.
Regardless of what politicians have been saying in public, everyone who has looked at the budget projections for the next few decades understands that, absent a sudden reduction in Americans’ life expectancy or other shocking development, middle-class -benefits are going to have to be cut, middle-class taxes are going to have to be raised, or both. The war between liberals and conservatives over the future of the welfare state is largely a matter of how much of each will be done. Conservatives think that it would be better to cut middle-class benefits than to raise middle-class taxes: that we should not take more out of people’s paychecks in order to give them more when they retire. Liberals would rather raise middle-class taxes than cut middle-class -bene-fits, a policy that reduces risks by setting a higher floor in retirement for everyone.
During the fiscal cliff debate, as in previous battles in that war, Republicans pointed out that the government cannot realistically make up much of its long-term financing gap by raising taxes on the rich. A tax-heavy solution to that gap will eventually have to rely on much higher taxes on the middle class. That’s how they finance large welfare states in other developed countries. European social democracies don’t generally have much higher taxes on corporations or high earners than the United States. The chief difference between their tax policies and ours is that they levy value-added taxes that hit consumption.
The fact that George W. Bush’s tax cuts were set to expire at the end of 2012, right after the reelection of President Obama, offered liberalism its best chance in decades for a large tax increase on the middle class. Democrats could not take the opportunity for two reasons. As Keynesians, they worried that the sudden imposition of higher taxes on the middle class in a time of economic weakness would cause another recession. As politicians, they knew that middle-class tax increases are deeply unpopular.
Still, there was a chance that Republicans would let the Democrats have the middle-class tax increases they secretly know they need, while minimizing the latter’s political costs: If Republicans had insisted on extending all of the Bush-era tax rates while Democrats insisted on extending only the middle-class rates, the resulting impasse could have sent us over the cliff, leading to higher taxes on everyone. Middle-class tax rates would have risen, and the child credit shrunk, to their pre-Bush levels. The Democrats could have tried to blame the Republicans for this result, saying that the GOP had let middle-class taxes rise as a consequence of its devotion to the interests of the rich. This strategy might not have worked perfectly: Democrats might still have suffered some losses in the 2014 elections as middle-class voters took out their frustrations over higher taxes on the president’s party. The higher taxes might, however, have outlasted any political reaction.
The deal averted any such scenario by extending the statutory rates enacted under Bush for almost all voters and striking any expiration date. To be sure, the payroll tax cuts enacted under Obama have expired, raising working people’s taxes. But federal revenues are expected to rise by only 2 percent. It will now take an affirmative act of each house of Congress and the president to raise anyone’s taxes beyond that level.
Avoiding blame for middle-class tax increases served the short-term political interests of both -parties; avoiding higher middle-class taxes themselves served the long-term ideological interests of only the Republicans. And the course of the debate over the fiscal cliff has reinforced the bipartisan taboo on openly raising middle-class taxes, a taboo that has persisted ever since Walter Mondale campaigned on tax increases in 1984 and lost 49 states. The only middle-class tax increase of any note to pass in recent years was Obamacare’s individual mandate, which had to be marketed as something other than a tax. Making matters worse for liberals, the political system has adopted a very broad definition of the middle class, one that includes, in the most recent deal, all couples making less than $450,000 a year.
Liberals will continue to want higher taxes and may even try, should the tides of politics shift sufficiently in their favor, to raise them on the middle class. The deal only means that future tax-hikers will have to raise middle-class taxes from a lower level than they would have had we fallen off the cliff to stay, and they will have to fight harder for their gains. Those are not small things.
This argument—that keeping middle-class taxes low serves the cause of limited government—has much in common with what has been called the “starve the beast” theory: the theory, that is, that depriving the government of revenues will restrain spending. That idea was associated with the libertarian economist Milton Friedman, who argued that spending amounted to the sum of available revenues and the maximum politically acceptable deficit. That equation made controlling revenue seem to be the key to controlling spending.
The last few decades have not been kind to the theory. Taxes have fallen without much in the way of spending restraint. In 2003, the Bush administration both cut taxes and expanded Medicare to cover prescription drugs. William Niskanen, another libertarian economist, found that falling tax revenues were actually associated with higher spending. It may be that campaigns to cut taxes raised the size of the deficit the country was willing to -tolerate and prevented Friedman’s mechanism from working. So some conservatives and libertarians have moved toward a different theory: Serve the check. Make the middle class pay more of the price of government and it will demand less of it. On that theory, the fiscal cliff deal was a disaster because it protected the middle class.
The behavior of Republican politicians before Reagan was roughly consistent with the serve-the-check theory, even if they never articulated it. Newt Gingrich, representing the rising Reaganite view of taxes, condemned Bob Dole, an adherent of the old consensus, as a “tax collector for the welfare state.” Dole Republicans would raise taxes to cover spending increases and cut taxes only when spending fell—which it never did.
The track record shows that neither starving the beast nor serving the check reliably constrains government spending. But if you believe that at some point, not all that far off, a rebalancing of the federal budget is both necessary and inevitable, and all of the budget deals and fights of any given year are actually attempts to influence the shape of that eventual settlement, then matters are pretty simple: Lower taxes push in the direction of lower spending, and higher spending in the direction of higher taxes. And the lower taxes that matter most for the shape of that settlement are the taxes on the middle class.
Ramesh Ponnuru is a senior editor at National Review, columnist for Bloomberg View, and visiting fellow at the American Enterprise Institute.