Friday, January 16, 2009

Bartlett on What the Republicans Should Do Next

I never know quite what to do with Bruce Bartlett. As a former adviser to Jack Kemp, he has his thumbprints all over one of the silliest initiatives in modern public finance : the supply-side revolution which held (in its extremest form) that you can make big tax cuts without losing a penny--not a penny!--in public revenue. In fairness, I'd have to concede that Bartlett himself never ventured quite so far into moonbat land as some of his allies. He remains one of the most adventurous and (mostly) intellectually honest figures on the "conservative" (if you can call it that) side of public revenue discussions.

He's back this week (in Forbes), arguing that it's time for conservatives to put the past behind:
The original [supply-side] idea was to cut marginal tax rates--the tax on each additional dollar earned--in order to revive the supply side of the economy by stimulating work, saving, investment and entrepreneurship. Now that argument is generally accepted. I am not aware of any reputable economists on the left who want to raise the top rate back to 70%, or even 50%. The most that they talk about is going back to the 40% top rate that existed under Bill Clinton. Contrary to what some Republicans think, this will not destroy the economy; it did pretty well after Clinton raised the top rate in 1993, despite Republican claims of doom.

Republicans also have to accept that there is a limit to tax-rate reduction. Cutting the top rate from 70% to 50%, as Reagan did in 1981, provided a huge increase in the after-tax rate of return. Some taxpayers went from keeping 30 cents on a dollar of interest or dividend income to keeping 50 cents--a 66% increase. But dropping the top rate from 40% to 35%, as George W. Bush did, only increased the after-tax return by 8.3%.

That's not nothing. But one can hardly expect the same kind of economic gain from reducing the top rate a little from an already low level as one would get from reducing a very high rate a lot. Nor can we expect a small increase in the top rate from a historically low level to have disastrous effects. Yet some Republicans continually make extravagant claims for small tax cuts and predict disaster from small increases when there is no evidence to support either proposition.

Instead of defending the Bush tax cuts, most of which expire next year under laws that Republicans wrote, I think it would be better for them to abandon Bush's tax policies altogether. The evidence is pretty clear that they did little good for the economy. Therefore, getting rid of them will do little harm.

Going forward, I think Republicans should try to be the party of investment, because Democrats are basically the party of consumption. While there is certainly a case to be made for raising consumption in the short run, the fact is that many of the consumption-oriented policies being proposed by Democrats in Congress would be proposed even if the economy was booming. There is never a time when Democrats aren't in favor of more health and education spending, aid to state and local governments, and so on--just as there is never a time when Republicans aren't for tax cuts.

"Investment" for present purposes, apparently means support for privatization and revival of the Investment Tax Credit. Somewhat surprisingly, "education" in this model turns out to be "consumption" not investment (I assume this is a swipe at English majors?).

A side issue: supporting privatization, Bartlett says as if beyond controversy tdhat "Amtrak and the Post Office don't work very well." Really? I use the post office a lot these days: brisk, efficient, and the price is right. And Amtrak--back in 2006, I did a Wash/NYC commute for a few months on Acela, and I loved Amtrak. Thank you, taxpayers, for making my life so much easier, but at least you can take consolation from the fact that you have at least one happy camper.

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