July 18 (Bloomberg) -- Vice President Joe Biden, in the heat of the high-level budget deliberations, told Republicans that their intransigence over taxes was a matter of ideology not economics. It’s also about coalitions and contributors.
Congressional Republicans rejected a grand-bargain deficit-reduction plan that would have slashed spending, including on entitlements, while raising revenue. Higher taxes, charged Republicans such as House Majority Leader Eric Cantor of Virginia, would be a job killer in a struggling economy. Cantor pulled the rug out from the efforts of his fellow Republican, House Speaker John Boehner, and Democratic President Barack Obama, to strike this historic deal.
It was about politics not jobs.
Both Ronald Reagan and Bill Clinton engineered big tax increases that were followed by robust economic gains. Politically, however, tax cuts are the glue that holds together the Republican coalition. It used to be anti-communism, until the Berlin Wall came down.
There’s still a divide on social issues, and even a number of anti-abortion or anti-gay rights Republicans don’t consider these questions priorities. With the wars in Afghanistan and Libya, it’s tough to distinguish between the foreign-policy positions of conservatives and those of liberals.
There is no such confusion when it comes to taxes. With enforcers such as the anti-tax crusader Grover Norquist looking over their shoulders, Republican politicians know that if they even entertain the idea of higher taxes, they throw away any national ambitions, may be threatened in a primary, and, if in a position of leadership, face a revolt from the rank and file.
The political hero for these conservatives is Reagan, who did slash taxes his first year as president. What the Eric Cantors of the world don’t know or ignore is that in 1982 -- in the midst of what was then the worst economic downturn since the Depression -- Reagan approved the largest peacetime tax increase in history. On Sept. 3, 1982, the day he signed the tax hike, the jobless rate was 10.1 percent.
In today’s dollars, TEFRA (The Tax Equity and Fiscal Responsibilities Act) and an accompanying small increase in gas taxes would have raised the equivalent of almost $1 trillion dollars over 10 years.
The result: the economy boomed in 1983 and 1984, and that year, Reagan successfully ran for re-election on the theme of “Morning in America.” (Reagan also approved three more major tax increases, starting with higher Social Security levies in 1983).
Bush Tax Cuts
Then there is the contrast between Clinton and President George W. Bush on taxes. In 1993, Clinton engineered an increase, mainly affecting the wealthy; eight years later, Bush won a huge cut and followed that with more reductions two years later.
The Eric Cantors of those days were certain of what would occur. The Bush tax cuts would stimulate the economy and generate lots of jobs. Dick Armey, the House Republican leader, said the Clinton increase was a “job killer” and House Speaker Newt Gingrich predicted it would lead to a recession.
The results: 23 million new jobs were generated during the Clinton presidency; 3 million under George W. Bush. Republicans insist there were extenuating circumstances. A year after Clinton’s tax increase, when the jobless rate had dropped to 6 percent from 7.6 percent, Armey gave the credit to the Federal Reserve. Ron Johnson, a current Tea-Party-backed Republican freshman senator from Wisconsin, says all those job gains of the 1990s were due to Reagan’s policies of the previous decade.
Growth and Jobs
Few would equate higher taxes with economic growth. The experiences of the 1980s and 1990s, however, eviscerate the contention that tax hikes are automatically job killers or tax cuts automatic engines of growth.
Even if the tax-cuts-are-sacred argument is a policy failure, it remains a political winner in the Republican Party. It’s a coalescing and defining issue, and a big element in drumming up campaign contributions.
The conservative talk-radio host Rush Limbaugh, a major force in today’s Republican Party, warned that if congressional Republicans agreed to more taxes “you can say good-bye to the Republican National Committee,” which would “implode” as donors fled.
Nowhere is this dogma more in evidence than in the passionate Republican efforts over the years to eliminate or reduce the estate tax paid by wealthy heirs.
Last December, Senator Jon Kyl of Arizona and other Republicans told the White House there could be no short-term stimulus deal without a more generous estate tax revision: One that would exempt $10 million for a couple, with a maximum 35 percent rate, rather than a $7 million exemption, with a 45 percent rate.
Over two years, that difference was a tax break of more than $13 billion for the wealthiest one-tenth of 1 percent of estates. It has great fundraising appeal. During a campaign to maintain the estate tax several years ago, some universities argued that that higher exemptions and lower rates would adversely affect charitable contributions. Wealthy trustees, however, successfully pressured them to stay on the sidelines.
The message of estate-tax opponents is that it hurts small businesses and family farms. Michael Graetz, a Columbia University Law professor, a former tax official in the George H.W. Bush Treasury Department and the author of a book on the estate tax, dismisses these arguments. He suggests restoring the lower exemption and higher rate and excluding all legitimate small businesses and family farms. There would be few Republican takers for that proposal.
Taxes and Cuts
There is a consensus that the U.S. has a long-term chronic debt problem. There’s also a consensus, among serious experts and every bipartisan commission that has studied the issue, that it can be addressed only with cutbacks in the growth of entitlements such as Medicare and with higher taxes.
In the intense negotiations with Boehner, Obama became the first top Democratic leader in modern times to consider significant changes in entitlements. The result could have been a real grand bargain on deficit reduction -- with $3 of spending cuts for every $1 of revenue increases -- while achieving a long-held Republican dream of curbing entitlements on a bipartisan basis.
That sweeping achievement, Cantor and Republican rank-and-file members concluded, wasn’t worth giving up the tax cut glue that guides their politics.
(Albert R. Hunt is the executive editor for Washington at Bloomberg News. The opinions expressed are his own.)
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