In 1980, that terrible year of stagflation, when Ronald Reagan was gaining the Republican nomination for president, dueling editorials appeared in the Wall Street Journal about “The Battle for Reagan’s Soul.” The first, by that title, came from neo-conservative sage Irving Kristol, who alerted readers that an effort was on by the establishment to capture Reagan. Individuals like Alan Greenspan, one supposes, and other Nixon-Ford leftovers were counseling Reagan not to strive to get everything he wanted. In the interest of a balanced budget and defense buildup, said prudence, he should go easy on tax cuts and even a stringent monetary policy.
Lewis E. Lehrman, the raconteur entrepreneur, piled on with “Stop the Battle for Reagan’s Soul.” Just do it all, Lehrman said, implying cut taxes, strong defense, robust trade, modest safety net, spare regulation—and gold-based money. Lehrman’s logic: if you do it all, you’re likely to get everything. If you do a little, here comes nothing.
Thirty-four years later, in our own semi-stagflation summer, we have a new intra-GOP dust-up. One wing of the party is saying there is too much focus on tax cuts. “Give Reagan a Rest,” as one of the entries put it, contending that focusing on rates is out-of-touch in Obama’s America. The manifesto of this movement, Room to Grow, somehow came out the very day that one if its personifications, Rep. Eric Cantor, got crushed in his primary by the sense-talking free-marketeer Dave Brat.
Nice and ludicrous, in other words, this dust-up. The thrust of Room to Grow and the like is that child tax credits and block grants dished out to local pols is the way conservatives could win over the middle class. Whining about 40% marginal tax rates in an era of the top 1% is “so 1979” (Ross Douthat’s phrase).
Let’s not get so heated up as to miss the point that the messiah Obama has inverted the tax code. There is seriously regressive taxation in this country—not progressive, regressive. The more you make, the less you pay, that kind of regressive.
The top statutory income tax rate at the moment is 42.5% (with the mandatory Medicare add-on included), beginning on about half a million in income. Whoever pays this is a sucker. There are so many exemptions and opt-outs in the code, procured by the many millionaires care of their K Street agents, that to pay the top rate is to say you didn’t try. The effective tax rate for tippy-top earners is probably about 20%, if not 10% or 5%. Hence the phony clamor for the “Buffett rule.”
Middle-income? Thanks to the child credit which enamors the GOP moderates, its phase-out takes the statutory federal tax rate on the fourth quintile of income to 30%. Say you live in California and have kids and make $110K (which is to say Joad-clan like money). Your marginal tax rate is basically 40%. If you’re a dual-earner, the social security cap doesn’t apply, so your marginal rate on the next ten grand would be over 50%.
Working class? As Casey Mulligan has shown, these guys are looking at marginal rates around 100%. Obamacare has loaded up on the poor-people subsidies and working-people phase-outs to such a degree that you often take home as much money at $30,000 per year as you would working your fingers to the bone to get to $50,000.
The tally of our current marginal tax rates: rich, negligible; middle-class, stifling; working class, pick-pockety.
The moderates say don’t focus on cutting tax rates. Yet cutting tax rates is the easiest way to devalue exemptions and ease the bite of phase-outs. They be clueless!
Reagan’s problem in the 1980s is that he did not quite do it all, as Lehrman had suggested. He did almost all. He cut tax rates, spending came nicely down over the long arc of 1983-2000, the bloated Pentagon won the Cold War care of Lech Wałęsa’s prayers, the regulatory explosion planned in the 1970s didn’t happen—and then a few things got left on the table.
Reagan ramped up the war on drugs and the police state—big mistake of commission. But the one great thing that Reagan never did was a formal reform of the monetary system. In 1971, the United States opted for fiat money, taking the dollar off gold, and we got the stagflation decade. When Reagan entered office, the Federal Reserve found religion and pretended the dollar was on gold, organizing monetary policy such that the private price of gold stayed low and constant at around $325 per ounce.
All that had to be done was to make this standard, even statutory. The time frame was 1983 to 2000. The U.S. would commit to buying and selling gold freely at $325. Never happened. The door was left open for discretionary money. Thus came the woeful Fed adventurism that gave us the 2000s. There would never have been the capital misallocation that ruined the 21st-century economy had we been on gold, and we had ample opportunity to do just that.
If Republicans want to complete Reagan’s agenda, limit government and make the dollar convertible. The prosperity will be so great, the only casualties will be the redundancies in government employment. But in the face of abundance, these once-again-good people will find themselves in the real world, better off financially, if not in terms of their very soul.