Reihan: The Logic of Tax-Cutting

I've never been a great enthusiast for tax cuts per se. I much prefer tax reforms that make the burden more family-friendly and more growth-friendly. My sense is that we should keep taxes as low as possible for as long as possible consistent with maintaining high-quality public services. This means that "shifting the tax burden from the rich to future generations" is a bad idea. Tax cuts today often mean big tax hikes tomorrow, as Daniel Shaviro convincingly explained a few years back.

But of course the United States has a characteristically "exceptional" approach to taxes. Despite the fact that there was no real clamor for across-the-board tax cuts during the first Bush term (from pressure groups, yes, from the middle-class voters who theoretically decide elections, no), we got them in the spades. The rich were the big beneficiaries, of course, but middle-class voters found that state and local taxes, health care, and housing now far outweight the federal tax burden as a source of anxiety. Naturally, this has increased demand for government. This dynamic will define US politics for the next few years.

New Labour seemed to have "solved" this puzzle by delivering macroeconomic stability and a highly opaque tax code loaded with user fees, a stamp duty, and other "revenue enhancements." New Labour's (attractive) message was that you get what you pay for when it comes to public services, so the public must accept somewhat higher taxes in exchange for more choice and higher quality.

I say "solved" because there is an increasing sense that the British public hasn't been getting what it's paid for. And so the appeal of tax cuts is rising from the dead. This is particularly interesting because until relatively recently, the Conservatives have been terrified of promising tax increases for fear of being painted as extremists who want to gut public services. Even now they are careful to at least pretend to responsibly cost out any tax cuts and to propose revenue replacements. George Osborne's promise to slash the inheritance tax is (it now seems clear) largely responsible for Gordon Brown' retreat from a fall election.

Anatole Kaletsky has a brilliant column on what's going on:

After many years of disappointment about public service standards, voters are deeply sceptical about promises from all politicians, regardless of party, to improve education, clean up hospitals or make the streets safe. This does not mean that voters are indifferent to policies on crime, health and education. They care about public services a lot and would reject any party that looked like doing major damage in these areas. They may not, however, attach much weight to any promised improvements until these are clearly demonstrated in their own lives. Tax cuts, on the other hand, are palpable as soon as they are announced.

Kaletsky has some other more striking observations.

Young voters trying to climb on to the housing ladder were attracted by the cuts in stamp duty. Even more importantly, middle-aged, middle-class women, eager to maximise the legacies that they can leave to their children and grandchildren, will vote for any party promising to relieve them of inheritance tax.

This is despite the fact that:

Inheritance tax is, from an egalitarian standpoint, the fairest and most progressive of all taxes.

As Americans know very well, certainly with regards to the inheritance tax,

such an “immoral” and “regressive” tax policy seems to be exactly what voters – including many marginal Labour and Liberal voters – enthusiastically support. And all over the world – in America, Ireland, Japan and more recently even in France and Sweden – we have seen regressive consumption taxes rising, while “progressive” taxes on wealth and inheritance disappear, providing disproportionate benefits to the wealthiest voters.

What all this means for observers of the American political scene is not immediately clear, but I have some theories. I'm hoping to write more about this in the near future.