“WHAT? Are we giving up?!” That’s what one McCain loyalist moaned as the Republican tax debate raged in New Hampshire last week. His man, John McCain, had just proposed tax cuts far smaller than the ones George W. Bush has on the table. Moreover, McCain launched his program amidst a swell of political rhetoric that sounded, from the news reports, like it was written by James Carville. McCain said the Bush tax cuts were too big and too risky. He accused Bush of skewing his tax cuts to favor the rich.
The prevailing view in Washington conservative circles was that this was close to political suicide. Republican primary voters don’t respond to class-war rhetoric. New Hampshire voters, famously anti-tax, don’t want to hear that the government needs to keep more of their money, especially at a time when the tax burden is at an all-time high. Hadn’t Ronald Reagan demonstrated that big tax cuts are the key ingredient in Republican victories? Hadn’t George Bush the elder beaten Bob Dole in 1988 in New Hampshire on the strength of a no-new-taxes pledge? Was McCain really going to contest the New Hampshire primary with a plan that seems to appeal more to Al Hunt than Adam Smith? “Throw us into that briar patch,” Bush aide Karl Rove told Paul Gigot of the Wall Street Journal.
The Bush campaign quickly went on the offensive, pointing out how much more money voters would get back under their plan — not just voters at the top of the income scale, but voters toward the bottom, too. But a funny thing’s happened over the past two weeks, since taxes emerged as the central issue in the Republican race. By and large, McCain’s poll numbers have not sagged. In December, a Quinnipiac College poll showed Bush and McCain in a dead heat in New Hampshire. But a Quinnipiac poll released on January 13 showed McCain leading Bush by nine points, 37 percent to 28 percent. A Reuters poll released January 11 had McCain up 41 percent to 34 percent. The American Research Group tracking poll showed virtually no movement between January 4 and January 12. Bush was ahead, but barely: 35 percent to 32 percent, within the margin of error.
There’s no evidence that McCain is helping himself with his tax plan. But neither is there much evidence that it has been the slam-dunk political disaster that most Republican and conservative savants think it is. And that means the New Hampshire primary is going to be a fascinating case study. For two decades now, taxcutting supply-siders have been crushing the green-eyeshade fiscal-austerity wing of the party, at least on the campaign trail. Even Bob Dole, who regards supply-siders the way most of us regard spiders in the shower, was forced to capitulate to political reality, naming Jack Kemp as his running mate in 1996 and adopting an across-the-board tax cut. But if John McCain can go on and win the New Hampshire primary with his rhetoric about entitlement protection and fiscal prudence, it will signal a seismic shift in the Republican electorate.
It’s more than a little ironic that George W. Bush has emerged as the supply-side champion. During his years hanging around his father’s administration, he certainly didn’t go out of his way to befriend the growth wing of the party. His father cut the infamous 1990 budget deal that put deficit reduction above tax reduction. And as governor, Bush proposed a complex tax bill in 1997, which cut many taxes but raised others. Texas legislators, most of them conservatives, gave the plan a frigid reception, and many anti-tax activists think Bush is a credible candidate today only because the legislature gutted his proposal and put in place a straightforward tax-cutting program.
Nonetheless, in campaign mode, Bush asked Lawrence Lindsey, one of the most credible supply-side economists, and a team of others from the Hoover Institution and beyond to come up with a tax plan. They put together a proposal that cuts the top marginal tax rate from 39.6 percent to 33 percent, with similar marginal rate cuts down the line. Bush promoted the plan in vintage supply-side fashion, “The federal government, in peacetime, has no business taking more than 33 percent of anyone’s paycheck. After all, the entrepreneurs of America create jobs, take risks, and make their profits with honor. My tax cut plan will expand their ranks by encouraging American enterprise, not penalizing it.”
Bush continued, “There are only two things that can be done with a surplus. It can be used by government, as the president proposes. Or it can be used by Americans to save and build and invest. . . . I choose the creation of wealth, over the care and feeding of government.”
The supply-siders, recognizing an ally, drifted from the Forbes campaign to the Bush campaign. Last week, Forbes ran attack ads saying the Bush tax cuts weren’t big enough. Arthur Laffer responded that Forbes’s ads against Bush “are the most anti-Reagan thing on earth.” Lawrence Kudlow, another key supply-sider, said that Forbes was alienating his political base, “the small but influential group of supply-side economists that engineered the Reagan tax cuts.”
The most interesting shift has occurred at the Wall Street Journal editorial page. The Journal doesn’t endorse candidates, but you don’t have to be the Oracle of Delphi to figure out which candidate the Journal editorialists look upon most favorably. The editorial page has longstanding ties to Steve Forbes. But as the Forbes candidacy was fading, editor Robert Bartley went down to Austin with Amity Shlaes and Paul Gigot and talked taxes with the governor. Bartley came back and wrote a piece that caused early morning gnashing of teeth at Forbes headquarters. He likened George W. Bush to Ronald Reagan, supposed lightweights who can get things done. Bartley’s message was clear. It was a laying on of hands. Bush understands the way the world works.
When McCain came up with his fiscal prudence, Bartley responded in a column that stung: “Despite a generally conservative disposition, it seems, the senator’s honor muse somehow has a tendency to recycle the Beltway’s conventional wisdom.” Paul Gigot followed with a column the next day criticizing McCainomics explicitly. McCain’s tax cuts are a “relative pittance,” Gigot noted. “The essence of his emerging tax strategy, in fact, sounds a lot like Al Gore’s. Propose a variety of small, targeted tax cuts that at least let you claim to favor tax cutting. But then attack anything larger for ‘leaving Social Security in danger.'”
On McCain’s side, there is a disjunction between the substance of the plan and the way it is being promoted. Kevin Hassett, who works a few yards away from Lawrence Lindsey at the American Enterprise Institute, was a principal formulator of McCain’s tax plan. He argues that there is more than one way to be a supply-sider. The economists who fixate on the top marginal rate are being “overly theological.” The better approach is to start with a grand vision of what the ideal tax regime looks like.
The best regime, Hassett believes, would place almost no tax burdens on savings. Instead it would tax consumption (George W. Bush’s tax plan in Texas in 1997 also shifted the burden to consumption). Hassett says that if you give middle-class people more reason to save, you will unleash more capital for investment than you would by reducing the top marginal rate on income. The McCain plan includes Family Security Accounts, into which families could place up to $ 6,000 tax-deferred per year, as long as the money stayed there for at least one year. The savings and interest could be withdrawn after a year without any penalty.
This is a step toward a consumption tax. Since income minus savings equals consumption, Hassett says, if you reduce the tax on that portion of income that goes to savings, you are shifting the burden onto consumption. This is a better way of taxing consumption than the old-fashioned way, a sales tax collected at the cash register. In the age of e-commerce, he says, it doesn’t make sense to try to impose an old-fashioned consumption tax at the point of sale. Better to collect it up top, at the point of income.
Hassett makes a supply-side case for the McCain plan, saying it packs powerful growth incentives. But all the candidates’ tax proposals are political documents, not legislative documents, and it’s a mistake to get lost in the details and arcana. There is no question that the McCain campaign is promoting its plan with rhetoric straight out of the songbook of the Concord Coalition, the group launched by Warren Rudman to worry gravely about deficits and “irresponsible” tax cuts.
The two words that pop up again and again in McCain’s tax literature are “responsible” and “security.” The McCain campaign sent out a fax two weeks ago that asked menacingly, “Does Bush Plan Leave Money to Save Social Security?” (Their answer was no.) McCain boasts that his plan funnels more money into Social Security to cover liabilities that are owed to those who are soon to retire, while also shifting as much as possible into a privatized pension plan.
In short, Bush promotes his tax plan with traditional supply-side arguments that have carried the day in election after election: Get the money out of Washington. Reduce top marginal rates so entrepreneurs can invest and flourish. You are overtaxed and you deserve your money back. McCain, meanwhile, leans on fiscal austerity arguments that have not worked well with Republican voters in the past: We have to be prudent because we don’t want to return to the days of deficits. We have to fund our current entitlement liabilities. We have to pay down the debt. We have to worry about the gap between rich and poor and shouldn’t skew tax cuts to the rich. McCain’s strategy is both old and daringly new. Old, because it reminds one a bit of Eisenhower-era prudence, and new because nobody has tried to win the Republican primaries with this strategy in a long while.
The odds are still against McCain, but there is at least a plausible case to be made that his campaign has a more accurate reading of the Zeitgeist than the Bush campaign. We are living in an anti-political age, when most Americans feel detached from public life. They don’t expect much from their government. Many people feel they have more to fear from government doing something wrong than they have to gain from government doing something right. So it is possible they will prefer whichever candidate seems the more modest and risk averse. That is how McCain is pitching his tax plan.
Furthermore, this is a conservative era. It is not conservative in the Newt Gingrich/Republican revolution sense. It is conservative in the old-fashioned sense. People cherish the status quo and want to preserve it. McCain goes out of his way to say that his is the true conservative plan, and by the old definition of conservative he is right. It is possible that in affluent, post-culture-war America, voters will opt for a candidate who seems to favor restraint and sobriety. Conservative in temperament, these voters may reject ambitious plans conceived in some think tank, and gravitate instead toward the candidate who is criticized for being too modest. They may prefer a candidate who talks about shoring up imperfect existing institutions — like Social Security — to a candidate who proposes bolder plans of action. After all, if there is one thing we have learned about American voters this decade, it is that they don’t like dramatic plans from the left (heath care) or the right (the Republican revolution). They are looking for modesty.
Of course GOP primary voters may be different. These are the people who cheered on the Republican revolution, the ones who listen to Rush. But even in the strongholds of the right, the old passions seem a little subdued. The fires of social conservatism are not nearly as hot this election as they were in past elections. The same may be true of economic conservatives. Moreover, Republican primary voters are more affluent than ever before, and affluent people tend to be milder than angry populists. Affluent people may also vote their social identity more and their pocketbook less. That is to say, they may rather support a McCain plan that makes them feel like sober, public-spirited citizens than a Bush plan that returns more money to them. In other words, we may be seeing a shift in the conservative temper, away from the angry spirit of the tax revolt, and back to the risk-averse spirit of upper-middle-class fiscal prudence.
Also, McCain may be able to get away with this sobriety on tax matters because he is so high-flown in his rhetoric about patriotism and national purpose. He doesn’t come across as a bland Howard Baker, because he is so lofty when talking about foreign policy and political reform.
The economists can argue about which plan is better on the merits, but it all makes for a fascinating political experiment, which comes wrapped in ironies. John McCain, who started his campaign as the bold maverick, now stands, on economic matters, as the prudent conservative. The supply-side Reagan tax cuts paved the way for this era of unprecedented prosperity. But prosperity created a massive class of affluent burghers who may respond more to the genteel concerns of the Concord Coalition than to the raw zeal of the supply-side entrepreneur. George Bush, who rejected his father’s instinctive fiscal prudence, may end up being beaten by a man who adopted it.
It’s still unlikely. But if John McCain with his cautious proposal does end up beating George W., somewhere in the inner sanctum of some plush office in Washington, Richard Darman will be laughing.
David Brooks is a senior editor at THE WEEKLY STANDARD.
