Tax Cuts and the U.S. Economy

As the Trump administration limps to a close, the main legislative achievement of the last four years has been a tax cut for the wealthy.  For years Democrats have wondered how Republicans can get away with cutting taxes for the rich, again and again, and yet still count on a large number of votes from working class voters.  The answer is that these voters are not voting for Republicans despite the tax cuts for the wealthy, but because of those tax cuts.

To understand this, take a look at this chart:

For seventy years Gallup has been asking Americans which party they think will do a better job with the economy.  Striking to see is that from the 1950s to the 1970s—three decades—Democrats had an advantage on this measure that sometimes reached over 30 points.  They lost it in the 1980s, very rapidly, and have since traded places with the Republicans on it.

The repeated policy of cutting taxes has allowed Republicans to craft a powerful narrative: that economic growth is a matter of getting the government out of the way of business, and that Republicans are the ones who will be laser focused on getting the government out of the way of business.  Whatever else happens in American politics, Republicans will cut taxes.  They may not be able to get much of anything else done, as this administration has not been able to boast many other significant legislative achievements, but if you put a Republican in office you can count on tax cuts occurring.

There isn’t very strong evidence for the proposition that tax cuts contribute to economic growth—it seems to depend on what you spend the tax revenue on—but the story is a coherent one, and it has eclipsed the Democrats’ story, which is that investing in the country—its roads and bridges, its scientists, the health and education of its people—is the path to economic growth.  While Americans do like government spending, there is no strong equation today that government spending equals job growth.  When Democrats fight for government programs, they fight for them on moral terms, which leaves open the opportunity for the Republicans to argue they are the grown-ups protecting the economy.  It wasn’t always this way.  The New Deal programs that built the American state were lifelines for many people, and they too were backed for moral reasons, but they were also clearly intended to resuscitate capitalism, and defended for doing so—which is why Democrats had such a strong advantage at mid-century on who would do better with the economy.

Thus, Republicans stick to their strategy of tax cuts, even as economists doubt their benefits.  Of course, it helps that donors like tax cuts, but the origins of the tax cut policy are not in the preferences of the wealthy, as much as in the politics of maintaining the Republican Party’s reputation as having, and implementing, a strategy for economic growth.

Progressives spend a lot of time arguing that Republican voters are hypocrites for drawing on government programs while claiming to hate government spending.  But to a Republican voter whose main concern is the economy, this is a non sequitur. It’s as if I said “I would like a job” and you responded “You hypocrite!  How dare you, when you benefit from all this government spending!”

A much better strategy would be to actually talk about where the jobs will come from. There were good reasons why the argument that government spending equals growth came under fire in the 1970s.  The New Deal investment-led growth regime had ended in recession, gas lines that stretched around the block, and increasing frustration with the inability of three presidents—Richard Nixon, Gerald Ford, and Jimmy Carter—to control inflation.  But after four decades of tax cutting and deregulation, it’s clear that investment in a few key areas—child care and parental leave, vocational training and job retraining, infrastructure, health, and education—has been neglected for too long, and could be the recipe for growth.

Looking ahead, Democrats don’t have to leave behind their traditional focus on redistribution and equality, which are very popular as well as being grounded in moral principles that most Americans value.  But to appeal to a certain segment of voters, Democrats have to figure out how to communicate that policies that reduce poverty and inequality can be exactly the policies that will improve economic growth.  Ronald Reagan used to argue that the best anti-poverty program was to create jobs.  Democrats need to explain why the best jobs program may be to reduce poverty.

 

Author(s)

  • Monica Prasad's areas of interest are political sociology, economic sociology, and comparative historical sociology. She has written three award-winning books using comparative and historical methods to examine the political economy of the United States and Europe, including the history and divergent trajectories of welfare states, the rise of “neoliberalism,” and the origins of distinct patterns of economic growth in different countries and their consequences for redistribution. Her scholarship has received the Fulbright award, the National Science Foundation Early Career Development Award, the Guggenheim Fellowship, and several other grants and awards.

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