The GOP confronts its disadvantage: Populist tax policy is popular

Whatever anyone thinks of Marco Rubio, to characterize him as anything other than a risk-taking iconoclast would be unfair.

Rubio nearly scuttled his political career when he took on the issue of immigration reform following the 2012 election, a contest in which Republicans lost not only the presidential race but in a variety of down-ballot contests that shocked the party to its core. Rubio took the recommendations in the RNC’s “autopsy” report to heart, and his aborted approach to the reformation of the country’s immigration system resulted in lingering mistrust between him and the GOP’s conservative base. It is a testament to his skill as a politician that the Florida Republican has not only bounced back from that debacle but is today a viable presidential contender.

But it’s not just the party’s conservative grassroots that Rubio has aggravated. Ahead of his presidential bid, the Sunshine State senator went about alienating the GOP’s tax hawks for whom no vestigial policy preference is more important than the across-the-board income tax cut. Rubio joined Sen. Mike Lee (R-UT) in calling for a reduction in the top marginal rate from 39.6 to 35 percent, but that has left many conservatives unsatisfied. “Some argue that it leaves the top rate far too close to the current highest bracket of 39.6 percent,” Politico observed. “And they note that it would apply the 35 percent rate to individual incomes as low as $75,000, possibly exposing many middle-income earners to a significant tax hike.”

“The Rubio-Lee plan takes a different approach in the name of achieving the old Republican goal of growth,” read a Wall Street Journal op-ed from Amity Shlaes and Matthew Denhart. “But the approach is so different that it can hurt the viability of the Republican Party and even set in train changes that may slow future growth.”

“If we ignore that graduated rates of taxation treat Americans very unequally while penalizing achievement, Rubio and Lee are calling for a $2,500 per-child tax credit that very explicitly hands to politicians the power to unfairly play favorites, all the while dictating what should be personal family decisions,” John Tamny agreed in a post published in Townhall.

Tamny noted that the Rubio-Lee plan would call for a reduction in corporate taxes from 35 to 25 percent. America having the highest corporate tax rates in the industrial world, this significant reduction only makes sense. The two Senators stressed that their reform proposal is designed to ensure that the tax code both promotes growth and fair for individuals and businesses alike. “Indeed, they call for 100% deduction of expenses for businesses making equipment purchases, inventory upgrades and infrastructure improvements,” Tamny added, “ but such a ‘tax cut’ is but another example of social engineering, corporate edition.”

To see why, readers need only consider 2008 taxpayer bailout recipient, General Motors. Long on plant & equipment, the tax subsidy Rubio and Lee are proposing would redound to GM in a big way. At the same time it would hurt a newer company like Uber whose value mostly resides in an “app.” Why should Uber face a tax rate of 25% so that GM can lower what it pays to well below 25% through tax subsidies on the equipment it purchases?

This is not unfair criticism, but the counterargument that conservative critics of the Rubio-Lee tax plan frequently dismiss is that Hillary Clinton’s tax policy preferences are far less palatable for most conservatives. A strategy of aggressive tax cuts is only as valuable as the paper on which it is written if Republicans are never in a position to implement it. What polls consistently show, and conservatives seem uneager to address, is that the data suggests that Americans are in a populist mood. The public does not think that the wealthy or that corporate entities pay enough in taxes, and the tax burden on individuals in upper and middle-income tax brackets doesn’t especially bother a majority of the voting public.

“If voters think the GOP’s big economic idea is tax cuts for rich people, the next American president will probably be another Democrat,” American Enterprise Institute fellow James Pethokoukis wrote.

That’s why it was savvy of Marco Rubio to talk more about education than tax cuts during his presidential announcement speech on Monday. But the Florida senator does have a big tax-cut plan, first co-authored with Sen. Mike Lee of Utah. And this plan would indeed cut taxes for rich people. The top tax rate on labor income would fall to 35 percent from 40 percent. And investment taxes, like those on capital gains from a stock portfolio, would be eliminated. Overall, the proposal would lose $2 trillion to 4 trillion over a decade, depending on how much it boosted economic growth.

But as much as Rubio would cut taxes for the top, he wouldn’t take rates back to the 25 percent level of the Roaring Twenties either — only to where they were during George W. Bush’s presidency. And he also wants a big tax cut for families, by expanding the Child Tax Credit and letting parents apply it against both income and payroll taxes. And for those two sins against the current Republican consensus, The Wall Street Journal editorial page declares Rubio “strong on foreign policy, less so on taxes” and disparagingly calls him the leading GOP proponent of the idea “that the Reagan tax-cutting agenda is a political dead end, and that the party now must redistribute revenue directly to middle-class families.”

Republicans don’t merely have an emotional or nostalgic attachment to the policy of reducing the tax burden on individuals and corporations; it is a sound policy preference rooted in decades of research and centuries of theory. That doesn’t mean that the GOP’s tax policy preferences are popular. They aren’t.

Just take a look at Pew Research Center’s February poll on the public’s perception of tax policy and its impact on their lives. “Almost two-thirds (64%) say they are bothered a lot by the feeling that some corporations aren’t paying what’s fair in federal taxes, and 61% say the same about some wealthy people,” Pew discovered. “Just 20% say they are bothered a lot by the feeling that some poor people don’t pay their fair share.”

pew taxes

According to Gallup’s March survey of the public, 44 percent of the public identifies as Republican or leaning towards Republicans while 42 percent said the same as Democrats. The 64 percent of the public that doesn’t believe corporate entities pay enough in taxes is not comprised entirely of the remnants of the Occupy Wall Street movement. Conservatives have to come to terms with a frustrating political reality: A populist message on tax policy has quite a bit of cross-partisan appeal.

This isn’t to say that conservative arguments about the stifling complexity of the tax code and the negative effect that a high tax burden has on growth are invalid. But good policy is not always good politics, and the party positioned to implement their policy preferences in 2017 will be the party that sells the public on their platform. Tax policy hawks who grumble that they just haven’t found the right messenger for their ideas in the last 30 years might want to confront the possibility that those ideas simply lack a receptive audience. Those committed conservatives who vote for Republican politicians for reasons other than just their preference for uniformly lower taxes should begin to dabble in the art of compromise.