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New Graetz Book Chronicles and Critiques the Antitax Movement

Posted on Mar. 4, 2024

Micheal J. Graetz writes fact-filled books about topics that demand more attention. In The Power to Destroy — How the Antitax Movement Hijacked America, the professor emeritus at Columbia Law School and Yale Law School masterfully describes how a cast of prominent conservative politicians and pundits over the past 50 years has galvanized the American public’s deep-seated but scattershot dislike for taxation into a resilient political movement that has moved the political center of gravity to the right and the level of the national debt skyward.

In the Beginning, 1978-2000

Let’s begin with a rapid-fire review of the antitax movement Graetz describes, with quotations from the book in parentheses. It started in August 1978 in California, when voter-approved Proposition 13 mandated massive cutbacks and limitation of growth on local property taxes (“a political earthquake”). Adding their considerable clout to the movement in the late 1970s and early 1980s were evangelical Christians who were livid about IRS challenges to the exempt status of their segregated schools. (Ronald Reagan said those IRS actions threatened “the destruction of religious freedom itself.”)

The ascent of supply-side economics in the late 1970s, particularly the Laffer Curve, gave the veneer of academic respectability to the politically convenient notion that tax cuts could raise revenue. (Former Nixon economist Herbert Stein called the idea “extreme to the point of bizarre.”) Promising to balance the budget, Reagan succeeded Jimmy Carter, and in 1981 he signed into law massive tax cuts. (Before becoming Reagan’s running mate, George H.W. Bush called Reagan’s supply-side proposals “voodoo economics.”)

Although the movement’s influence continues to grow, it wasn’t always smooth sailing. With deficits at frighteningly high levels shortly after passage of the Economic Recovery Tax Act of 1981, Reagan was compelled to approve tax increases in 1982, 1983, and 1984. (“Asked if he had any regrets, Reagan responded: ‘Well I do. The deficit is one.’”) With tax cuts out of fashion, the landmark Tax Reform Act of 1986 was deficit neutral. Nevertheless, the federal debt that was equal to 25 percent of GDP when Reagan took office equaled 40 percent in 1988. Then, in a further stunning setback for the antitax movement, George H.W. Bush signed legislation to increase taxes in 1990 after proclaiming at the 1988 Republican National Convention: “Read my lips. No new taxes.”

But those reversals were temporary. In 1995 Newt Gingrich became the first Republican speaker of the House in four decades. Joining Gingrich, prominent antitax conservatives like Grover Norquist, Sean Hannity, Jack Kemp, and Dick Armey kept the antitax message alive on television and radio while Matt Drudge and Andrew Breitbart pioneered “politically powerful antitax content” on the internet. One outcome of these efforts was the Taxpayer Relief Act of 1997, bipartisan legislation with tax cuts for both sides. With a booming stock market causing the deficit to rapidly disappear, Bill Clinton agreed to reinstate the preferential rate for capital gains in return for Gingrich approving new tax benefits for higher education. (“The so-called center continued to shift to the right because conservative Republicans stay put while Democrats keep meeting them halfway.”)

Intensification, 2001-2023

In retrospect, George W. Bush’s 2001 tax cut was a chip shot for the antitax movement. The Congressional Budget Office was projecting a cumulative $5.6 trillion surplus over the next decade, and Fed Chair Alan Greenspan worried about how the absence of federal debt could affect financial markets. The event that truly demonstrated the movement’s power was the enactment of a second set of Bush tax cuts in 2003, ushering in the return of large deficits. It seems that instead of weakening the antitax movement, the elder Bush’s reversal on tax increases only strengthened the resolve of its proponents, so much so that his son was “determined not to incur the wrath of antitax Republicans who so tormented his father.”

The financial crisis that began in 2007 precipitated a series of emergency measures that resulted in the federal debt as a percentage of GDP increasing from 35 percent in 2007 to a shocking 70 percent in 2012. In the wake of the upheaval emerged the Tea Party. Although the ballooning federal debt was an overriding concern, tax hikes had no place on the Tea Party agenda. With hostility to taxes now suffused into the fabric of American politics, any possibility of revenue-raising legislation was obliterated by the rejection of revenue hikes (dressed up as “tax reform”) recommended by the high-profile bipartisan commission chaired by Alan Simpson and Erskine Bowles.

Like Clinton, Barack Obama suffered significant setbacks in the first midterm elections of his presidency. Facing a pair of fiscal cliffs in 2010 and again in 2012 (when the Bush tax cuts had expired), Obama compromised with Republican leaders in Congress. Obama had promised to extend the Bush tax cuts for all taxpayers except those with incomes exceeding $250,000, but he ultimately agreed to a $400,000 threshold as well as a reduction in spending levels. Graetz concludes: “Despite the Republicans’ moaning, they had won the war on taxes.”

Donald Trump ran for president, embracing the Republican antitax orthodoxy and promising large tax cuts. (“I try to pay as little tax as possible because I hate what they do with my money.”) After his election victory — with Republicans in control of Congress and the Senate able to bypass the 60-vote filibuster under “reconciliation” budget rules — Trump (“the king of debt”) signed into law the $1.5 trillion Tax Cuts and Jobs Act in December 2017 despite gloomy deficit forecasts and the absence of any need for stimulus.

Before passage of the TCJA, many Republican lawmakers had vowed not to vote for a tax bill that increased the deficit. But there was a lot of dancing around this point. Then-House Speaker Paul Ryan and House Ways and Means Committee Chair Kevin Brady claimed that the plan would not increase the deficit. Similarly, Treasury Secretary Steven Mnuchin told the press the tax plan would “pay for itself with growth . . . and with reduction of different deductions and closing loopholes.” The most prominent of all such dubious claims was from President Trump himself: “When [the 2017 tax cut] really kicks in, we’ll start paying off the public debt like water.” The official tax scorekeeper for Congress, the staff of the nonpartisan Joint Committee on Taxation, did not agree, estimating that the law would reduce revenue by $1.46 trillion over 10 years when using conventional scoring techniques and by $1.07 trillion when positive macroeconomic feedback effects were considered.

Because legislation enacted in the Senate under reconciliation rules might not add to estimated deficits outside the 10-year “budget window,” Republicans included in the TCJA termination of the individual tax cuts at the end of 2025. That sets the stage for what some are now calling “taxmageddon” — a major debate battle over extension of, and modification to, the TCJA after the 2024 election. But note well, Democrats led by President Biden have promised to extend those cuts for taxpayers with incomes below $400,000. To extend the bulk of the individual tax cuts in the 2017 legislation (which every Democrat voted against) even after the pandemic caused an additional increase in the federal debt is another major concession by Democrats. It seems that while the need to raise revenue is rising, the will to do so is falling.

Anybody wishing to constructively participate in the debate on tax policy cannot rely solely on their technical training and experience, whether in law, accounting, or economics. Also needed is historical perspective like that provided in Graetz’s exceptionally well-written book. Tax practice and academic work on tax are brainy stuff that only tangentially touch on political considerations. In contrast, tax policymaking is more art than science, and politics is paramount. No matter how clever and well crafted a proposal might be, it will become law only if it can be navigated through a political process in which sound bites and anecdotes matter more than facts and logic.

On that point Graetz quotes Thomas Sewall Adams, a prominent Treasury official in the 1920s: “Modern taxation or tax making . . . is a hard game on which he who trusts wholly to economics, reason, and justice will in the end retire beaten and disillusioned.” The good news is that reading The Power to Destroy — in sharp contrast to most inherently tedious tax treatises — is a painless and entertaining way of getting beyond the antiseptic technical aspects of tax to an understanding of how tax law is really made. For students of tax, it will likely be the most well-received item on reading lists of professors wise enough to include it. For the public, it is a must-read narrative history on a subject matter they otherwise might avoid.

Good or Bad for America?

But the book is more than a detail-laden, yet mercifully compact narrative of the past half-century of tax politics. Throughout, Graetz forcefully argues that the antitax movement has been harmful — that it has “hijacked America” — implying that the United States has veered off course from what ultimately would be a better outcome. Making that case won’t win Graetz any popularity contests, if only because most of the public naturally dislikes the financial burden of tax, fears the IRS, and loathes the complexity of complying with laws they can barely understand. Moreover, Graetz can expect that antitax movement thought leaders will respond to his critique with various policy arguments. Let’s play the role of devil’s advocate and briefly explore whether the book adequately addresses those arguments.

Challenge 1. When government extends itself beyond its primary functions of military defense, enforcing contracts, and protecting citizens, it restricts freedom and creates inefficiencies. Henry David Thoreau wrote in 1849 that “government is best which governs least,” and Reagan said in his first inaugural address, “Government is not the solution . . . government is the problem.” So anything that helps control the size of the U.S. government — like promoting tax cuts or blocking tax hikes — is inherently good for America.

Discussion. Of course, on several margins the federal government is inefficient. And the anecdotes describing the bungles are often humorous and, in any case, effective anti-government propaganda. But the reality is that when pressed, most Americans don’t really want a federal government that, as Norquist colorfully described, is small enough to “drag it into the bathroom and drown it in the bathtub.”

Most complaints about “big government” are directed at activities funded by nondefense, discretionary spending. However, all but 15 percent of federal government spending is on entitlements, national defense, and interest on the federal debt. And though there was some grumbling about the enormous spikes in federal expenditures during the previous two recessions, the need to provide significant relief during those emergencies was never seriously challenged.

Open for debate is the need to expand or shrink other categories of federal spending: support for the elderly, low-income households, education, healthcare, transportation, and a host of other causes. But the key point is that in any examination of budget policy, we can bypass the contentious and complicated debate about the value of government.

As Figure 1 shows, no matter how much politicians and the public speak about the need to cut spending, that spending is rarely subject to significant cuts. That is true even when Republicans occupy the White House. Reagan did not cut spending. And even when you exclude the years when emergencies required large outlays, there were no significant spending cuts during the administrations of George W. Bush and Trump. Moreover, given economic and demographic trends, it is difficult to imagine how the U.S. legislative process in the future could yield anything but significant growth in spending on entitlements, defense, and interest on the debt.

Figure 1. Federal Spending as a Percentage of GDP

Graetz points out that after passage of Proposition 13, California saw a precipitous decline in spending on public education, police protection, healthcare, and welfare. So, there certainly seems to be a link between lower taxes and tax cuts and government spending at the state level where budgets must be balanced.

But at the federal level, with billions of dollars of additional debt being issued every day, any hoped-for downward pressure on spending is minimal. As the conservative economist William A. Niskanen wrote:

The starve-the-beast perspective has led too many conservatives and libertarians to be casual about the sustained political discipline necessary to control federal spending directly, succumbing to the fantasy that tax cuts would solve this problem.

If our political system then leads to decisions that roughly reflect voter preferences, the longer-term challenge for those of us who favor limited constitutional government is to try to convince voters to reduce their demand for the services financed by federal spending. Until that time, some increase in federal taxes appears to be a necessary part of a fiscal policy to balance the budget. [Niskanen, “Limiting Government: The Failure of ‘Starve the Beast,’” 26 Cato J. 553 (2006).]

Despite all the tough talk from conservatives about cutting spending (mostly in the abstract without being specific about which programs to cut), Graetz echoes Niskanen’s critically important observation: “The American people — and their political representatives — have demonstrated an unwillingness to limit government spending and tax expenditures to anywhere near the levels the public funds with taxes.” As long as that is the case, the main impact of the antitax movement will be an unprecedented deterioration of federal finances. The antitax movement and U.S. addiction to debt are two sides of the same coin.

Challenge 2. Tax cuts may increase deficits, but concerns about the federal debt are overblown.

Discussion. “Reagan proved deficits don’t matter.” This remark from Vice President Dick Cheney to Treasury Secretary Paul O’Neill (shortly before O’Neill was fired) could be interpreted in two ways. First, as a matter of politics, administrations that run up the national debt are not punished by voters in the polls. This seems correct: Reagan was reelected despite enormous deficits generated during his first term. And it seems efforts to cut deficits are punished, as indicated by the defeat of George W. Bush in 1992.

A second interpretation of the Cheney quote is that deficits, as a matter of economics, aren’t harmful. In the 1980s and early 1990s, the need to get federal finances under control was at the top of the policy agenda. (The federal debt as a percentage of GDP peaked at 48 percent in 1993.) The conventional wisdom was that government borrowing would raise interest rates and “crowd out” productive private investment, which in turn would reduce productivity, wages, and economic growth. Also looming in the background was the fear that high levels of federal debt would trigger some sort of financial meltdown.

Well, all the gloom-and-doom predictions were wrong. With a bit of help from deficit reduction legislation in 1990 and 1993, and a bunch of help from a booming economy, deficits turned to surpluses at the beginning of the millennium. Interest rates fell. Money from overseas provided plenty of funds for domestic investment. There was a financial crisis, but that had everything to do with misleading evaluations from bond rating agencies and nothing to do with the federal debt.

For folks who believe that happy turn of events might repeat itself, we offer a three-part warning. First, the federal debt now at 100 percent of GDP is more than double what it was during the darkest days of deficit distress. Second, as we have already emphasized, all indications are that the need and the public’s demand for higher levels of spending will only grow. Third, deficit reduction legislation like that enacted in 1990 and 1993 will be more difficult to pass now because the political environment is much more fractious and partisan.

Challenge 3. The benefit of economic growth from tax cuts outweighs any negative effects.

Discussion. We will dismiss out of hand the notion that “tax cuts pay for themselves” — that is, that tax cuts increase economic growth by such large amounts, the positive effects on revenue of a larger tax base offset the negative effects on revenue from a reduction in rates (or other legislated tax cuts). Most economists — including those with conservative leanings — don’t believe we are, as they might say, “on the right side of the Laffer Curve.” See Figure 2.

Figure 2. A Hypothetical Laffer Curve

Much more plausible and within the mainstream of economic thinking is the idea that tax cuts might stimulate some growth, so the true revenue cost to legislation is below that indicated by traditional “static” estimates (that assume the overall size of the economy is unaltered by the proposed change in legislation). In other words, the argument could be made that even though we are on the wrong side of the Laffer Curve, the benefits of some extra growth might mitigate the dangers of a larger debt.

A too-often insufficiently discussed basic economic proposition is that an increase in the size of the economy from a tax cut is more likely when the economy is in recession. (Though this point bolsters the justification for tax cuts, most right-leaning economists are inclined to dismiss the plausibility of such short-term, demand-side effects of tax cuts and instead emphasize long-term, supply-side effects.)

Airing out the issues involved in estimating the size of any supply-side effects of tax cuts would require a book-length review of the numerous economic studies on the topic. Let us leave the reader with a few quick observations. Not all tax cuts are equal: Growth effects will depend on the type, design, and timing of those cuts. For example, tax cuts that promote investment in research can be expected to provide more growth than tax cuts for middle-income taxpayers who will most likely use the money for current consumption. The growth effects could take years to materialize. And, of course, like so much in macroeconomics, the estimates are highly uncertain.

A good point of reference for those who want some idea of the quantitative magnitude of the potential growth effect from tax cuts is the dynamic revenue estimates from the highly respected, nonpartisan staff of the JCT (which has been extensively studying this topic for more than two decades). As noted, for the TCJA the staff’s estimated static revenue loss was $1.46 trillion; the estimated dynamic revenue loss was $1.07 trillion. Thus, according to those estimates, economic growth effects reduced the revenue loss by 27 percent. (If these same models and assumptions are used by the JCT for any extension of the TCJA individual tax cuts, the offset percentage in their dynamic estimates is likely to be smaller because individual tax cuts deliver less bang for the buck than those from the business tax cuts in the 2017 legislation.)

Chaos or Compromise?

As the time for the great tax battle of 2025 fast approaches, with the most likely outcome being legislation that increases projected deficits, Graetz asks good questions about the antitax movement: “How long can this go on? And if and when it becomes necessary, how will it stop?” Graetz doesn’t supply the answers — and we don’t know anyone else who does. But one thing appears certain: What may have seemed like a good idea when record inflation was pushing the middle class into higher tax brackets, the top individual rate was 70 percent, and the national debt was equal to 25 percent of GDP has much less justification now that the income tax brackets are indexed to inflation, the top tax rate is below 40 percent, and national debt is larger than GDP and growing.

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