Bruce Bartlett’s new book, The New American Economy: The Failure of Reaganomics and a New Way Forward, comes out next week. The New York Times’ David Leonhardt wrote a really nice story about Bruce’s current perspective on supply-side economics and tax policy and how the Republican Party has lost its fiscally-conservative way (emphasis added):
[P]erhaps the most persistent — and thought-provoking — conservative critic of the party has been Bruce Bartlett. Mr. Bartlett has worked for Jack Kemp and Presidents Reagan and George H. W. Bush. He has been a fellow at the Cato Institute and the Heritage Foundation. He wants the estate tax to be reduced, and he thinks that President Obama should not have taken on health reform or climate change this year.
Above all, however, he thinks that the Republican Party no longer has a credible economic policy. It continues to advocate tax cuts even though the recent Bush tax cuts led to only mediocre economic growth and huge deficits…
On the spending side, Republican leaders criticize Mr. Obama, yet offer no serious spending cuts of their own…
How, Mr. Bartlett asks, is this conservative? How is it in keeping with a party that once prided itself on fiscal responsibility — the party of President Dwight Eisenhower (who refused to cut taxes because the budget wasn’t balanced) or of the first President Bush (whose tax increase helped create the 1990s surpluses)?
“So much of what passes for conservatism today is just pure partisan opposition,” Mr. Bartlett says. “It’s not conservative at all.”…
True fiscal conservatives should be advocating a more balanced budget, certainly after we’ve recovered from the aftermath of this recession. (Bill Clinton made this his final point in his prepared remarks to the World Business Forum in New York City on Wednesday.) True fiscal conservatives understand that while the benefit of low tax rates is improved economic incentives for private-sector work and saving, the cost of low tax rates is the reduced public saving that arises from a larger budget deficit (or smaller surplus). The benefits were more likely to outweigh costs back in the days when marginal tax rates were very high. But now it’s a totally different story:
[Bruce's] conservatism starts with the idea that high taxes are no longer the problem, even if complaining about them still makes for good politics. This year, federal taxes are on pace to equal just 15 percent of gross domestic product. It is the lowest share since 1950.
As the economy recovers, taxes will naturally return to about 18 percent of G.D.P., and Mr. Obama’s proposed rate increase on the affluent would take the level closer to 20 percent. But some basic arithmetic — the Medicare budget, projected to soar in coming decades — suggests taxes need to rise further, and history suggests that’s O.K.
For one thing, past tax increases have not choked off economic growth. The 1980s boom didn’t immediately follow the 1981 Reagan tax cut; it followed his 1982 tax increase to reduce the deficit. The 1990s boom followed the 1993 Clinton tax increase. Tax rates matter, but they’re nowhere near the main force affecting growth.
And taxes are supposed to rise as a country grows richer…
Bruce argues that while the first goal of modern conservatism should be to keep government from getting too big, the second:
…should be to keep taxes from being increased in the wrong ways. Supply-side economics is based on the idea that higher tax rates discourage work and investment, two crucial ingredients for economic growth. But higher taxes on consumption don’t have nearly the same effect as taxes on incomes or companies. If anything, consumption taxes encourage savings, which lifts investment.
So Mr. Bartlett advocates a value-added tax — a federal sales tax — which most other rich countries have…
Even worse though, is to cut taxes in the wrong ways–such that even as public saving is harmed via deficit financing, private incentives to save and invest and work are harmed as well. Or such that most of the tax cutting agenda consists of a prior Administration’s tax policy that a new Administration understands has been proven to not pass the cost-benefit test.
It’s no surprise to Robert Bixby, executive director of the Concord Coalition, that the projections for tax revenue in fiscal year 2010 are fairly anemic.
“I think 2010 is already baked into the cake as a bad year,” Bixby said. “Part of the recovery will be continued high deficit spending because the economy will continue to need stimulus.”
But what he hopes to see in 2010 is at least a move toward revenue growth that picks up steam in subsequent years.
Based on current estimates, however, he’s not optimistic that will happen unless lawmakers take action…
“It’s important that there be a deficit reduction plan in Obama’s 2011 budget,” Bixby added.
He noted that having a plan doesn’t necessarily mean having to enact it right away if economic conditions aren’t right. But, he said, “We’re going to have to face tax increases eventually.”