Deep in the Heart of Taxes Jude Wanniski January 31, 2000

To: Richard W. Stevenson, NYTimes
From: Jude Wanniski
Re: Taxes as a Political Issue

Yes, Rick, I'm writing again about one of your NYT reports on tax/budget issues, this time your Sunday "Week in Review" article about the New Hampshire primary, Tuesday's Big Test: Deep in the Heart of Taxes." The thrust in your report is the division between Arizona Sen. John McCain, who is campaigning against a big tax cut, with the budget surplus to be used to pay down debt, and Texas Governor George Bush, who has a big tax cut in mind. If McCain wins in a state like New Hampshire which loves tax cuts, goes the reasoning, it will mean the tax issue no longer works the way it has since Ronald Reagan used it to win New Hampshire in 1980 and two terms as President. I notice that in this morning's Times, Steven Weisman of the editorial page puts an even finer point on this theme, saying Governor Bush tells him that while he intends to win the nomination on the tax issue, in the general election he will propose a combination of tax cuts and spending increases to help the poor.

Now I don't want you to think I'm picking on you by writing these critiques and posting them on the Internet. Quite the contrary, I think you are the most important journalist in Washington when it comes to these matters, and that over the years you have improved steadily in your willingness to explore all facets of the tax issue. The fact that in reporting this story you called Bruce Bartlett, a former Reagan Treasury official, is a good sign that you are willing to contact and quote supply-siders on these topics. Bruce reflects the general view of the supply-siders when he says, in your piece: "Rightly or wrongly, people have bought into the idea that big tax cuts are risky... At the same time, people know instinctively that the good times will not last forever. They view paying down the debt as putting money in the national piggy bank and as a way of dealing with the problems of the future."

Even Bruce, though, seems to miss the point that in the supply-side analytical model, only those tax rates that are unnecessarily high should be cut. That is, rates only should be lowered or eliminated when they are in the prohibitive range of the Laffer Curve -- which graphically demonstrates the law of diminishing returns in tax policy. If a tax rate were so high that it would discourage the production and exchange of goods and services to the point where revenues decline from an optimal point, then and only then is it wise to reduce it. There should be a positive return on investment (ROI) of the tax cut. Otherwise, projected surpluses should be used to finance spending that will have a high ROI, or be devoted to paying down debt for the reason cited by Bruce Bartlett. It is not surprising you are not making this point in your columns, because none of the GOP candidates are doing so -- and of course neither of the Democrats are doing so. The candidates should not be promising tax cuts per se, but tax cuts with a purpose.

You also continue to make the observation that Jack Kemp ran side by side with Dole as a tax cutter in 1996 and lost -- as if this were an early sign the voters are no longer attracted to lower tax rates. Kemp actually opposed the Dole tax cut before Dole asked him on the ticket, on the grounds that it would produce very little for a very high cost. Kemp's position had been to roll back the rates to where they were when Reagan was President -- a position rejected by Dole's advisors. If you would read my book on the 1996 campaign, The Last Race of the 20th Century, you will discover what really happened back then. Kemp lost his debate with Vice President Gore because Gore quoted Jack's criticisms of the Dole 15% tax cut.

If you notice, the debate between Bush and McCain is largely about nominal amounts of money, with Bush promising $483 billion over five years and McCain promising a number half as large, even smaller than the nominal amount promised by President Clinton in his new budget. Jack Kemp finally announced his endorsement of Bush last week, although he certainly would not have designed the Bush tax platform the way it is constituted. The capital-gains tax is the worst tax of all on the Laffer Curve, a direct tax on the nation's living standard, yet Bush never mentions it in his $483 billion bundle. For that reason alone I suspect Bush would not have a successful administration and I will not endorse him myself (although I may be forced to vote for him).

Your most serious mistake in this otherwise fine piece, Rick, is when you say: "True supply-siders say that tax cuts will not only keep the economy healthy, but that returning excess revenue to the taxpayers is the best way to stop the relentless growth of government." Now this is flat wrong. A "true" supply-sider is indifferent to the size of government. If the government proposes to increase spending by $10 billion on programs that produce a positive ROI, instead of lowering taxes in ways that produce little or no positive return -- elimination of the marriage-tax penalty for example -- as a "true" supply-sider I would take the spending. It may seem like splitting hairs to you, Rick, but it exactly explains why voters seem uninterested in the GOP tax cuts, as they did to the Dole 15% pledge of 1996 -- which, by the way, was designed by the same people who have designed Bush's $483 billion bundle.

You come closer when you say of supply-siders: "They point out that when the issue is framed as a choice between letting politicians spend the surplus and letting individuals choose how to use their own money, tax cuts get strong support in polls. ‘The key is to link it to wasteful Washington spending,' says Frank Luntz, a Republican pollster. ‘That's when it becomes not only good policy but good politics.'"

In this formulation, you see the wisdom of the electorate in responding to the prospect of tax cuts. If they are a means to a worthy end, they will find support with the voters. The Kennedy tax cuts of 1963-64 were presented as a means of getting the country moving again, with JFK explicitly arguing that his proposed rate cuts would produce more revenue than the higher rates. This also was the thrust of the Reagan arguments in 1980. No longer. Republicans abandoned the Laffer Curve after the 1994 elections when they regained control of Congress. House Speaker Newt Gingrich walked away from the supply-siders and presented the GOP as the party of a balanced budget. The Old Time religion. Republicans have been in disarray ever since, wandering in circles, re-captured by the Political Establishment. If McCain wins New Hampshire tomorrow, please don't blame the supply-siders.