Donald Trump has managed to open up a serious debate within Republican politics. His call to eliminate a tax break that protects the wealth of hedge fund managers has stimulated a backlash among conservatives.
While most Americans would receive tax cuts under his larger tax plan, he said on “Face the Nation” that “the hedge fund guys, they’re going to be paying up.” He has criticized the provision that enables hedge fund managers to pay 20% capital gains tax rates on income known as “carried interest,” a rate much lower than what most people pay on their wages. Similarly, Jeb Bush has called for reform so that this money can no longer be taxed more lightly.
The conservative Club for Growth has predictably blasted the idea. This reform, it says, constitutes the kind of tax increase that should be anathema to the party of President Ronald Reagan. Raising taxes is unjust, club members say, and stifles economic growth.
The fact that Trump has come out in favor of such a proposal in their minds is clear evidence that he is a Democrat in hiding. They have launched a new effort in Iowa to undercut his electoral support, airing two biting anti-Trump commercials at a cost of $1 million. Trump, one ad says, is “just playing us for chumps” by play-acting the role of a real conservative.
Liberals who are becoming too giddy about this proposal should calm down. Both Bush’s and Trump’s plan would slash corporate and individual rates, making the tax system more regressive by lowering taxes on the wealthy. This is just one loophole-closing reform within a broader agenda of slashing the progressivity of the income tax system.
Bush’s proposal, according to Jared Bernstein, a former adviser to Vice President Joe Biden, is a “revenue-eating wolf in sheep’s clothing.”
Still, the debate that is taking place is very real for Republicans. The party has gone to great lengths since the 1970s to take tax increases off the table after many decades when a sizable part of the party understood that fiscal austerity required a combination of revenue hikes and spending cuts.
Right before the 2012 election, 238 House Republicans and 41 Senate Republicans had signed the “Taxpayer Protection Pledge,” in which they vowed to oppose “any and all efforts to increase the marginal income tax rate for individuals and business.”
The tenor of Republican politics changed significantly with the rise of the conservative movement. An anti-tax movement in California helped inscribe these principles into property taxes.
Conservatives such as Reagan argued that under almost no circumstances should tax increases be accepted, particularly on wealthier Americans and corporations whose investments benefited the entire nation. He saw taxes as immoral and economically inefficient.
He and others in his administration promoted a “starve the beast” strategy whereby Republicans would cut off the revenue sources of the federal government so that it would be harder to launch new programs.
Reagan’s historic across-the-board tax cuts in 1981 were praised as a major victory against liberalism. Grover Norquist, an influential conservative activist who founded Americans for Tax Reform (which promotes the no-tax pledge), pressured Republicans into agreeing they would not support tax increases.
In practice, conservatives had trouble living according to principle. Those like then-U.S. Sen. Bob Dole, R-Kansas — who still believed in balanced budgets more than anti-tax zealotry — forced Reagan into accepting tax increases in 1982 and 1983 in response to skyrocketing deficits. In 1986, Reagan accepted loophole-closing reform, including on wealthier interests, in exchange for another round of rate reductions.
Despite the inconsistencies, the passion for tax cuts has continued. When President George H.W. Bush accepted a tax increase to reduce the deficit in 1990 — despite his 1988 campaign pledge of “No New Taxes!” — Then-U.S. Rep. Newt Gingrich, R-Georgia, led a revolt against him.
After Bush agreed to the deal, Gingrich said: “We went over and I said (to Bush), I’m really sorry this is happening. You’re killing us, you are just killing us.” Conservatives never trusted him again.
His son George W. didn’t make the same mistake, sticking to the conservative script. In 2001, he pushed through a historic tax reduction that took a big dent out of the surplus and in 2003 pushed another, even though America was in the middle of a war against terrorism.
The positions of conservatives have moved even further to the right than when Bush was in office. Today, this is evident as the Club for Growth is attacking a proposed cut in loopholes, something that Republicans had accepted. Even this is much too much for them.
If Trump and Bush are able to shift the conversation back at least to where it was in the 1980s, it would be important step for the party — even if it is a baby step.
The adherence to no tax increases under any circumstances has damaged the ability of the GOP to legitimately claim the mantle of fiscal conservatism, and this stance has been a huge obstacle in budget negotiations with Democrats.
The fact that two mainstream candidates are willing to start taking on this orthodoxy could put the Norquist crew on the defensive and help the GOP strengthen some of its public image. More important, it might start to create conditions that would make it possible to normalize the budget process.
But significant changes are far away, as the million-dollar campaign against Trump shows. During the second debate, other candidates joined with Trump in calling for this loophole to end. Republican leaders on the Hill have been more lukewarm.
While there are some issues where conservatives are willing to give and take, taxation has not been one of them. Without any kind of change within the GOP, the prospects of a sounder budget process and path toward fiscal balance will remain elusive.