Published May 28, 2015
Like all the GOP presidential contenders, Scott Walker is being advised by economists and editorial writers to adopt a “cut the top rate first” tax policy. It would be a shame if he followed their advice, which would mean abandoning the approach that he has employed in Wisconsin to such political and economic success.
Standard “supply side” tax policy argues that the inventions and advances of the economy’s most active participants drive most growth. Thus, tax policy’s priority should be to encourage more of that activity by lowering the marginal rate on those participants’ income. Since the most economically active people tend to earn the most, supply-siders inevitably focus on cutting the top tax rate — which, at the federal level, currently starts at $457,601 for couples — as much as possible, even at the expense of tax cuts for earners in other income brackets. They vociferously oppose adding new tax credits or deductions to the code, and often even argue for the repeal of credits and deductions already on the books in order to “broaden the base” and finance further cuts to the top rate.
This theory has become Republican orthodoxy over the past two decades. It is, however, the exact opposite of what Governor Walker has pursued.
Walker has lowered Wisconsin’s rates on the personal incomes of all taxpayers, but he has done so more for those in the bottom tax bracket than for those in the top. On his watch, the marginal rate for families earning no more than $32,000 in gross income per year dropped from 4.6 percent to 4.0 percent. He cut the marginal tax rate for all income-tax brackets, but cut the rate for those in the top bracket (which for families starts at $320,000 in taxable yearly income) only a smidgen, from 7.75 percent to 7.65 percent. Moreover, Governor Walker approved two new deductions, one for contributions to health savings accounts and another for private K–12 tuition payments. These policies fly in the face of standard supply-side doctrine.
Walker has followed the same approach with his other tax-policy changes. Supply-siders strongly favor reducing corporate-tax rates, but Governor Walker has not lowered them at all. Instead, he has secured the passage of two large corporate-tax credits. One is available to individuals or corporations that derive income from manufacturing or agricultural activities in Wisconsin. The other allows a business to deduct up to $4,000 per new full-time-equivalent employee working in Wisconsin. Walker’s corporate-tax policy directly rewards in-state economic activity rather than cutting marginal rates.
Walker’s other major tax-policy change is an across-the-board reduction in property-tax rates. It applies to all owners of property and thus counts as a tax cut for both people and businesses. It does not, however, conform to supply-side theory, since the rate of property taxation has no bearing on the marginal incentive to work.
These supply-side heresies have not hurt Wisconsin’s economy. Unemployment has dropped from 7.9 percent to 4.6 percent since 2011. Wisconsin’s labor-force-participation rate has dropped by much less than the national average, and has even increased slightly in the past year. While Wisconsin’s economy has not performed significantly better under Walker than those of other midwestern states with Republican governors and legislatures, his policies have allowed middle- and working-class families to keep more of their income.
Walker has ridden these populist tax cuts to great political success. Wisconsin has not voted for a Republican for president since 1984, yet Walker has now carried the state three times in the last five years, with at least 52 percent of the vote each time. That is six percentage points better than Mitt Romney did in Wisconsin in 2012, and it’s been fueled by Walker’s strong support among Wisconsin’s working- and middle-class whites. Whites with a college degree constitute nearly half of Wisconsin’s electorate even in presidential years, and Walker carried them by a margin of 58 percent to 42 percent last year, doing significantly better than Romney did running on a tax plan that was a mild version of supply-side orthodoxy.
Walker’s tax policy helps address the GOP’s biggest weakness, the perception that it is the party of the rich and doesn’t “care about people like me.” Polls since 2012 have consistently shown that Americans think the economy is unfairly tilted toward the rich and that the Republicans are the party of the rich. A tax policy that essentially says America isn’t doing enough for rich people is unlikely to help the GOP nominee in 2016.
Romney lost because Obama beat him by 63 points among the fifth of Americans who thought the most important characteristic in a president was that he “cares about people like me.” Romney’s problem was even greater in Wisconsin. He lost by 74 points the nearly one-quarter of Wisconsinites who held that belief. Given this, why would Walker even think about changing his tax policies?
The example of Kansas governor Sam Brownback should cure Walker of any lingering desire to embrace the GOP’s conventional tax wisdom. Brownback has adopted a state version of the orthodox playbook. Kansas couples making $30,000 or less per year have seen their rates cut from 3.5 percent to only 2.7 percent on his watch, but top-bracket earners have seen a larger drop, from 6.45 percent to 4.6 percent. Brownback has also completely eliminated the state income tax for any individual filing as a “pass-through entity,” as most small-business owners do. In essence, Brownback reduced the tax rate on a large number of top-bracket earners from 6.45 percent to zero, theoretically removing any state-tax disincentive for job creators to generate wealth.
This supply-side approach has yet to significantly increase employment or economic growth in Kansas. Kansas’s unemployment rate is only slightly lower than Wisconsin’s, and it has declined by less since both governors took office in 2011. The labor-force-participation rate is also nearly the same in the two states.
Brownback’s tax policies have dramatically cut Kansas’s revenues. The governor has been forced to propose cutbacks or freezes in funding for a variety of programs, especially education, as a result. He has also proposed cutting the state’s payments into its employees’ pension plan, exactly the sort of underfunding that Republicans loudly criticize elsewhere. Fiscally, Kansas’s supply-side experiment has been a lot of pain with little to no gain.
There has been political pain, too, and it has been severe. Brownback was barely reelected in deep-red Kansas, winning by only a 50–46 margin in a GOP wave year. He ran ten points behind Mitt Romney’s 2012 showing in Kansas — even as Walker ran six points ahead of him in a much less Republican state. The 2014 exit poll also found that 53 percent of Kansas voters thought Brownback’s tax cuts were “bad for Kansas.”
None of this would have come as any surprise to the biggest tax innovator of them all, Ronald Reagan. Many claim him today as the political father of supply-side tax policy, but his words and deeds show that it was not quite so.
Reagan’s two major tax cuts included many provisions that supply-side advocates would criticize today. By indexing standard deductions and tax brackets for inflation, he steered hundreds of millions of dollars to middle- and working-class families, money that theoretically could have been used to cut top rates even more. And his 1981 tax cut allowed all workers to contribute to tax-deductible IRAs, exactly the sort of middle-class tax cut that today’s supply-siders deride.
Reagan’s break with supply-side theology seems even more pronounced when one examines his rhetoric. Supply-side theory lionizes the entrepreneur; it holds that certain people are “job creators” and that society benefits only by letting those people lead. But one will look in vain to find even a semblance of that sentiment in Reagan’s speeches.
I’ve read all of the major speeches Reagan gave on the economy or taxes between 1979 and his signing of the tax-cut bill in 1981. In these speeches, he never argues that economic growth is due to the very few. He is always adamant that we all contribute, that we are all “makers.”
Indeed, he used the word “entrepreneur” only once during this period. It was in his first inaugural address, and the manner in which he used it speaks volumes about the gulf between supply-side orthodoxy and Reagan’s actual thinking:
We have every right to dream heroic dreams. Those who say that we’re in a time when there are not heroes, they just don’t know where to look. You can see heroes every day going in and out of factory gates. Others, a handful in number, produce enough food to feed all of us and then the world beyond. You meet heroes across a counter, and they’re on both sides of that counter. There are entrepreneurs with faith in themselves and faith in an idea who create new jobs, new wealth, and opportunity. They’re individuals and families whose taxes support the government and whose voluntary gifts support church, charity, culture, art, and education. Their patriotism is quiet, but deep. Their values sustain our national life.
Now, I have used the words “they” and “their” in speaking of these heroes. I could say “you” and “your,” because I’m addressing the heroes of whom I speak — you, the citizens of this blessed land.
For Reagan, the entrepreneur is not someone who is better than we are. His or her contributions are no less, and no more, important to American prosperity than those of the worker, the farmer, or the shopper. To say anything else is not only anti-Reaganite; it runs afoul of Americans’ deep belief in equality. If Scott Walker wants to win the GOP nomination, and the presidency, he should resist the supply-side temptation and rekindle Reagan’s magic.
– Mr. Olsen is a senior fellow at the Ethics and Public Policy Center.