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Do conservatives and Republicans think too much about taxes? | American Enterprise Institute

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Believe it or not, the 2020 presidential election won’t just be about COVID-19. Well, maybe mostly. But not entirely. We got a reminder of that reality today when former Vice President Joe Biden appeared on CNBC and said that he would not increase taxes on those making less than $400,000 annually. “Nobody making under 400,000 bucks would have their taxes raised. Period. Bingo,” the presumptive Democratic presidential nominee said.

Assuming taxes will be a big election issue, which they typically are, you might want to check out a great chat on tax policy I had with my AEI colleague Stan Veuger back in 2015. Lots of great analysis and explanation in that conversation. Here’s one part I really liked:

Pethokoukis: When people look at the Reagan tax cuts, what people saw were across-the-board tax cuts that seemed to have an almost immediate, an almost magical, effect on the economy. An economy that was in a recession we went to a fast economy that was growing at something like 7 percent in ’84, and then kept growing at 3.54 percent for many years afterwards. Then you had the 90s boom. So one lesson people draw is that if you cut taxes, you are going to have just an immediate accelerator effect on the economy that potentially will last a long, long time and will really change incentives for people. So what are the right lessons and the wrong lessons to draw from the Reagan tax cuts?

Veuger: Well, I think the key lesson is those pretty aggressive tax cuts certainly won’t jeopardize the future of western civilization. And that’s what a lot of people on the left sometimes seem to argue, that it’s utterly irresponsible to even talk about cutting marginal tax rates for individuals or for corporations. We know that that’s just not true. And there is a reasonable chance that we will have additional growth.

On the other hand, I wouldn’t assign all of the growth we saw in the 1980s to the Reagan tax cuts alone. For example, the monetary policy environment I think was much more positive than it was in the 70s when there were staggering levels of inflation, partially driven by natural resource shocks but also by terrible Federal Reserve policy. All of that was gone in the 1980s, and I think that helped a lot. The other lesson that I think is often overseen is what the 1986 tax reform plan did was to lower individual rates relative to corporate rates. So that shifted a lot of corporate activity and a lot of corporate income that people had sheltered in corporations to the individual side. So that made individual tax revenue increases look very large, I think.

Pethokoukis: Do you think that Republicans — people on the right — over-emphasize the role of tax cuts? You have the Reagan example, where you had big tax cuts that seemed to be followed by a ton of economic growth. In the 90s, you had an example of higher taxes, and there also seemed to be a lot of economic growth. Then in the 2000s, you had again some more tax cuts, and the economy didn’t do so well. Is there too much of an emphasis on taxes as a way of influencing growth as opposed to some other policy ideas?

Veuger: Yeah, perhaps. I mean, tax policy is certainly very important, and it can help. I just wouldn’t expect two additional points of growth every year, even if we move to some ideal tax plan that would never be at political equilibrium. And I agree with you, there’s other stuff you can do. Innovation and new technologies are an important source of economic growth and I don’t think that tax policy is necessarily the most important lever for generating either technological innovation or other types of innovation.

And you know, in the end, you pointed out that there are three big examples, and that’s part of the problem: With a lot of these macroeconomic policies, we just don’t have that many observations. There’s a lot of other stuff going on in the 80s — just came out of the 70s — and there’s a lot of other stuff going on in the 90s, too, right? Because we have the dotcom bubble that’s building, and that contributed significantly, I think, to economic growth. And that was all happening in an international environment that was calm. You know a lot of countries were moving towards more productive economies. I think a lot of the benefits from the IT revolution — the legitimate ones, not the bubble — were the ones which were being incorporated into business practices.

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