A phenomenon whose time has finally come.
The American Spectator
Just when you think you’ve got the rules of politics figured out—that liberal Democrats won’t give up the theory, rhetoric, and practice of class warfare, for example, until you pry their cold, dead fingers from the wallets of the rich—along comes a one-two-three punch to send you reeling.
First was a long Wall Street Journal op-ed in April by investment banker Felix Rohatyn. The Lazard Freres & Co. managing partner (and Democratic Party maximum guru) renounced his redistributionist past and called for tax cuts to stimulate economic growth. Then came legislation introduced by the supremely liberal House delegate from the District of Columbia, Eleanor Holmes Norton. She proposed exempting D.C. residents from the (progressive) federal income tax , subjecting them instead to, in effect, a flat tax with a top rate of 15 percent. And soon after came a Washington Post editorial proclaiming the liberal newspaper’s support for Norton’s plan. The Post even suggested it might be a fine model for revitalizing other depressed urban centers.
This is emphatically not Dick Gephardt’s America.
Rohatyn, whom Mother Jones recently flagged as one of the biggest contributors to the Democratic Party, has for years been a stalwart supporter of a big government agenda, financed by high taxes and a steeply progressive tax code. Now, it seems, Rohatyn has bid farewell to all that. As he put it in the Journal: As a traditional Democrat, I have always believed that freedom, fairness and wealth, basic to modern democracy, required an essentially redistributionist philosophy of wealth, that a fairly steeply graduated income tax was required as a matter of fairness and that lower deficits would guarantee adequate growth and a fair distribution of wealth. The experience of the last two decades, with the advent of the global economy, has very much shaken that view. Fairness does not require the redistribution of wealth; it requires the creation of wealth.
He goes on to advocate sharply reduced rates of taxation on capital, regardless of the distributionist effects. Oh, and by the way: Death to the New Deal. In order to create a massive pool of private investment, Rohatyn also calls for the gradual privatization of Social Security.
Eleanor Holmes Norton’s case is not as spectacular, but it is every bit as dramatic and certainly more amusing. Five days before the September 1990 election in which she won the Democratic nomination for D.C. delegate–the District’s non-voting member of the House of Representatives–she had to ‘fess up to failing to pay D.C. taxes on hundreds of thousands of dollars in income during the 1980’s. She blamed her husband for failing to file the returns, and promised to fork over thousands in back taxes, interest, and penalties. Her little oversight didn’t sit very well with white Washington, where Norton had hitherto been running strong. But Norton’s support in the much-larger black community was enough to carry her into office.
Apart from that little boo-boo, however, Norton has never exactly had a reputation as a supply-sider, let alone a tax protester. Back in the days when Democrats were in charge, she was a tireless promoter of a commuter tax–a levy on the income of Virginia and Maryland residents who work in the District–as the premier solution to the city’s financial mess. Tax relief for District residents? Such a thing was simply impossible, given the city’s tremendous demands for social services, a freeloading federal government that never faced up to its obligations under home rule, the absence of statehood, etc.
Now Norton, too, has done an about-face. With the Republicans in charge, she has emerged as a realist, a Democrat who wants to work with the GOP leadership to get things done. She was instrumental in crafting the legislation that imposed a financial control board on the profligate D.C. government, where fiscal discipline had long been alien to locally elected pols. Yet the legislation she introduced April 15 (about which she’d been consulting with Jack Kemp) is a fabulous exercise in growth economics and empowerment-think. Instead of the old, progressive code, there would be a single rate of individual income taxation of 15 percent, coupled with generous exemptions ($15 ,000 for single filers, $25,000 for head-of-household filers, $30,000 for married joint filers). Norton’s proposal would retain the deductions for mortgage interest and charitable contributions. She would also eliminate the capital-gains tax on investments made in the District by its residents.
Her purpose in all this is quite explicit: D.C. has been losing residents and business. To survive, it must reverse the exodus. This tax proposal is designed precisely to promote growth and attract business and residents. But she won’t call it a flat tax. It’s progressive, she insists, because the rich pay more. Well, okay–but it’s the sort of progressive Dick Armey loves.
And, surprise of surprises, who should happen to love it but the Washington Post? Not hitherto receptive to the idea that lowering taxes creates growth incentives–the paper has long condemned the supply-side 1980’s–the Post is now saying that “the prospects for a sturdy tax base are slim to none without some incentive for residents and businesses to stay and for others to come in.”
It’s a little premature to claim revenge for Ronald Reagan, but the debate over growth economics has shifted dramatically. The change has resulted largely from the election of a Republican Congress, though not in the way some might caricature it–hard-body Reaganauts flexing their new legislative muscle. In fact, the liberal about-face has arisen partly in response to the critique of the Reagan years. The long period of high economic growth during the 1980’s was a remarkable achievement. But liberals weren’t about to acknowledge Reagan’s success. Instead, they developed two main lines of attack on the legitimacy of the economy’s high performance.
The first of these focused on the reduction in both marginal and capital -gains tax rates as the direct cause of the ensuing high deficits. Many supply-siders were at first indifferent to the economic consequences–if they saw any at all–of the rising deficit. According to the polls, though, Americans saw the issue differently. They didn’t like the deficit, so politicians quickly followed suit; soon everybody was “against” the deficit. For the right, it was the product of a Democratic Congress unwilling to cut spending; for liberals, it was a standing rebuke to Reagan’s fiscal policies.
The second attack was on distributionist grounds. After all–or so many Democrats said–this was the Decade of Greed, during which the rich got richer and the poor got poorer. The wealthiest Americans got pasted as the biggest beneficiaries of tax cuts. They were no longer paying their “fair share.” And the economic growth of the period did not “trickle down,” in the commonplace pejorative, to the poor or even the middle class. Conservatives responded that this was mere “class warfare” rhetoric, and that income distribution tables and charts showing who paid how much in taxes told a different story. But liberals kept up their charge of basic unfairness.
Many Republicans, to be sure, took these arguments about fairness and the deficit to heart. Although outright Republican repudiations of the Reagan years were few, by the time of the late Bush administration, a revisionist view had taken hold. Its two components were an unwillingness to defend lower top tax rates against political attack and a consuming focus on the elimination of the budget deficit.
When Democrats took hold of the White House in 1993, the overriding goal of the Clinton administration became deficit reduction. The administration was divided internally over the matter, but when the time came for the FY 1994 budget battle, the administration focused on and promoted a $500 billion five -year package of spending cuts and tax increases–including symbolically important income-tax increases on those earning most–in the name of reducing the deficit. This was a tribute to the salience of the issue. It easily trumped the Keynesian economic “stimulus” package of pork-barrel spending and political payoffs the administration also proposed. But there had to be something in it for Democrats’ troubles in inflicting $500 billion in pain. Now the “stimulus”- -in other words, the economic growth the Clinton plan promised–would come from a favorable reaction from the bond market. In other words, interest rates would fall and the economy would grow.
The GOP answer to the Clinton deficit reduction program was a plan that cut the deficit by the same $500 billion without raising taxes. It was a critical distinction because, Republicans argued, the Democrats’ tax increases would have a negative effect on economic growth. But what happened to the bold, tax -cutting Republicans of yore? They were mostly missing from the debate. In fact , the Contract With America itself is, at least in part, a product of the revisionist view of the 1980’s. The Contract did call for a reduction in the capital-gains tax rate, an essential element of a growth agenda. But the centerpiece of its tax cutting was a $500 per child tax credit–not any broad -based cut in rates. In effect, the Contract acquiesced in the top-rate increases that had taken effect since the 1986 tax reform.
As the GOP took power on Capitol Hill and the time came to implement their Contract, Republicans interpreted it to require bringing spending into line with forecast revenues. The balanced budget amendment may have failed, but the GOP made budget-balancing its top priority, and Republicans declared as much, loudly and often. The political pressure forced Clinton to respond that, of course, he too wanted a balanced budget–but maybe in ten years, or nine, or eight. The GOP relentlessly tried to pin him down. Eventually, after protracted political struggle, this would be codified as an unprecedented agreement between Democrats and Republicans to balance the budget in seven years according to the “scoring” of the Congressional Budget Office.
But, of course, there was no final agreement, and Republicans got most of the blame for the failure. Some of them, with the benefit of hindsight, became critical of the GOP’s focus on bean-counting and deficit economics. They should have been selling a bigger theme, something to get ordinary Americans excited in a way that wrangling over the “current services” baseline does not–or so, at least, the self-criticism held. That may be true. But despite the failure of budget negotiations, it’s striking what the Republican Congress and Democratic White House agreed on.
The budget would be balanced by spending cuts, not by tax increases–period. Thus, if a problem with the growth-based fiscal policies of the 1980’s was an unacceptable deficit, its solution was no longer to be sought in fiscal policies inimical to growth. In other words: tax increases.
Clinton had campaigned in 1992 on a middle-class tax cut of the kind subsequently embraced in the GOP’s Contract. But he abandoned that promise for the sake of “deficit reduction” in his first budget on taking office. Then, in 1994, he returned to it. When he finally proposed his seven-year balanced budget, it included a (modest) tax cut. So not only did the major players agree to balance the budget by cutting spending; they also agreed to do so while cutting taxes.
And that was the end of the link between cutting taxes and higher deficits- -the end, in other words, of the first major attack on Reaganomics. What about the second attack, the one focused on the alleged unfairness of Reagan-style fiscal policy? To be sure, most Democrats hammered Republicans throughout 1994 -95 for cutting spending on the poor to pay for unfair tax cuts on the rich. Which is to say that the Rohatyn-Norton tendency is certainly not widespread among Washington Democrats. Distributionist concerns and class-warfare rhetoric continue to animate many Democrats and to frighten a number of Republicans.
But if you are going to balance the budget and cut taxes, it’s only a small step to re-thinking which taxes to cut. Give something to the “middle class,” “working families,” “those who work hard and play by the rules”? Maybe so. But maybe also provide tax cuts targeted at economic growth. In the cases of Rohatyn, Norton, and the Post, we have indications that for some Democrats, very real distributionist concerns–the top agenda item of so many Democrats for so long–are yielding pride of place to growth economics.
Now, maybe all Norton and the Post are interested in is helping the locals. Still, it’s not easy to escape the implications of the arguments they are advancing: If the Norton plan would indeed promote economic growth in the District, wouldn’t its provisions, applied nationally, also promote growth? And if distributionist concerns can be overcome in relation to residents of the District, why should such concerns stand in the way of higher economic growth for all Americans? You’ve got to start somewhere–and proponents of growth economics could do a lot worse than having Felix Rohatyn, Eleanor Holmes Norton , and the Washington Post editorial page supporting their agenda.