A political economy regimen for Republicans.
While the first chart shows party identification by level and source of income, the second chart shows the evolution of party identification through the 2008 election. (The 2012 results won’t be released for at least a year, but are unlikely to have changed much.) Since the reelection of Ronald Reagan, about 50 percent of American voters have identified themselves as Democrats, about 40 percent as Republicans, and about 10 percent as independents. This means that, like Ronald Reagan, to win, a Republican presidential candidate must attract all of the Republicans, all of the independents, and some of what used to be called the “Reagan Democrats.”
The key to Reagan’s success was treating, as far as possible, labor and property income alike. That fiscal policy explains why a government that was as divided as today’s—with a Republican president and Senate and a House controlled by Democrats—achieved some of the biggest legislative victories of the 1980s: the tax reforms of 1981 and 1986 and balancing Social Security in 1983.
But every Republican presidential candidate since has lost on the economic issue, because of the principle that Jack Kemp, who devised Ronald Reagan’s tax strategy, borrowed from Arthur Laffer: “When you tax something, you get less of it.” Once the GOP shifted its ideal from taxing labor and property income equally to shifting the burden of government onto labor income, the party’s presidential candidates lost the support of independent voters and Reagan Democrats. The principles outlined by Mitt Romney were actually the closest any 2012 Republican presidential candidate came to taxing labor and property income alike. But without a specific plan, like the across-the-board 1981 Kemp-Roth tax-rate cuts or the Republican and Democratic prototypes for the Tax Reform Act of 1986, there was no legislative vehicle to deliver on Romney’s principles. Given the electoral arithmetic we have described, it is hardly surprising that President Obama defeated Governor Romney.
The following agenda would update and apply these tested American maxims of successful public finance (put here in slightly different order):
Instead of taxing income when received by workers and investors, all labor and property income should be taxed when first paid by businesses, governments, or nonprofit foundations, at a single flat rate, with no exclusions or credits (including capital gains and capital consumption allowances). A single credit for “human maintenance,” based solely on family size, would rebate income and payroll taxes up to the poverty level. (Property maintenance costs are already excluded before calculating property income.) Since existing deductions and exclusions are progressively skewed, imposing a flat rate upon a consistent measure of income would leave the distribution of the federal tax burden little changed. This is the bargain: The dominant Republican party faction gives up progressive tax loopholes, and the dominant Democratic party faction gives up progressive tax rates.
Current Social Security, Medicare, and Medicaid benefits should be balanced by current payroll taxes and premiums. But if prospective Social Security deficits continue, because of a shrinking workforce and fertility rate (from 2.5 children per woman in 1971 to 1.9 now), benefits should be made proportional not only to a worker’s past contributions but also to the number of children each worker has raised.
Unemployment insurance—which added about 2 percentage points to the unemployment rate when it was extended to as many as 99 weeks—should be restored to its original 26-week limit, which should cause a sharp fall in the unemployment rate to below 6 percent.
Automatic open-ended financing of federal deficits by the Federal Reserve and foreign central banks should be ended by defining the dollar again as a weight of gold while refunding existing official dollar and other official foreign currency reserves, much as Alexander Hamilton refunded the massive Revolutionary War debt.
We close with a prediction: President Obama will have succeeded, and any candidate of either party contending for the presidency in 2016 will succeed or fail, in precise proportion to his adherence to these classic and successful principles of American public finance.
Lewis E. Lehrman, senior partner of L.E. Lehrman & Co, and John D. Mueller, Lehrman Fellow in economics at the Ethics and Public Policy Center, are principals of the financial market consulting firm LBMC LLC.
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