RIP: Supply-Side Unicorns
An underappreciated development in this presidential race is right under our nose: We are debating seriously about how — not whether — Mitt Romney will offset the loss in revenue caused by his proposed 20-percent across-the-board tax cuts.
How, not whether.
I think this is, as Joe Biden would say, a big f’n deal. It represents a clean break from the supply-side fantasies of Arthur Laffer, Jack Kemp, Larry Kudlow, and vice presidential candidate Paul “Macroeconomic Feedback” Ryan. Mind you, I am not arguing that Romney is openly or even tacitly repudiating the idea of self-financing tax cuts. The shift is more tonal than programmatic. But it’s real — and it’s a signal of the basic sanity of Romney and economic advisers like Greg Mankiw.
I went back and looked at the across-the-board tax cut plan in the Bob Dole/Jack Kemp ’96 campaign. It’s striking to me how things have changed — subtly, perhaps, but substantially. Annelise Anderson, an economic adviser to the Dole campaign, said the tax cuts would be paid for because “people will do less tax-avoiding, and the economy will grow faster.” To diminish tax-avoidance, the Dole-Kemp campaign promised to end “special interest loopholes.” The Romney plan, vague as it is, goes further than ending loopholes; in theory at least, it will eliminate or limit tax deductions — a far bigger source of revenue that we now commonly recognize as “tax expenditures,” that is, spending.
But 1996 was a long time ago, right?
In a Twitter conversation, the Weekly Standard’s John McCormack pointed out to me that the Bush administration never pretended that its tax cuts would be offset. This is true. At first, the Bush tax cuts (and I’m speaking here of the 2001 cuts, as their income tax rate reductions are the closest analogue to Romney’s) were pitched in the context of annual budget surpluses. “It’s the people’s money,” Bush frequently argued, and it should be returned. Revenue loss, then, was a feature, not a bug. When it became clear that the surpluses would not materialize and the economy had stalled, the rate reductions were pitched as Keynesian stimulus — a way to ensure a “soft landing.”
But you could see a hangover of supply-side prestidigitation in the way the Bush tax cuts were defended in retrospect. Economist Bruce Bartlett rounded up a list of the most egregious apologias here. Senate Republican Leader Mitch McConnell’s assertion is the most infamous: “There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue because of the vibrancy of these tax cuts in the economy.” (The Heritage Foundation’s Brian Riedl made a more modest claim: “Simply put, the tax cuts played a relatively minor role in the budget deficits.”)
An early sign of fiscal sanity arrived last year when former Gov. Tim Pawlenty’s economic plan, with its assumption of robust five-percent annual GDP growth, was basically laughed out of town. Around the same time, National Review’s Kevin D. Williamson had an illuminating confrontation with Kudlow and other “magic unicorn” peddlers. “One can hope for growth beyond the trend line, but counting on it is something else. (And the something else it is is foolishness),” Williamson later wrote.
Now, none of this is to say that the Romney-Ryan budget plan walks on water. Every defense of it I’ve read assumes at least some increase in economic growth to bridge the revenue gap. (If Romney is elected, I anticipate we’re going to hear a lot about “dynamic modeling” and “dynamic scoring” next year.) And Romney is proposing spending cuts that are every bit as unrealistic as those included in the Dole-Kemp plan.
Maybe this is me subconsciously willing myself to warm to the idea of Romney winning. Maybe Romney is cynically planning not to offset his tax cuts — a scenario by which I would not be surprised at all, especially given Congress’s track of record of deficit-financing and pain-avoidance.
But I think this is an important development in our politics, and a healthy one.