In every truly excellent movie there comes the scene where our hero or heroine has gotten the drop on our now disarmed villain who helpfully suggests, "Put down the gun and we'll talk." Should our hero be foolish enough to abandon his advantage, the movie continues for another half hour.
In politics, the equivalent request for unilateral disarmament comes every election cycle with the demand, request or helpful suggestion that the Republican Party and its candidates abandon the tax issue. One understands the motivation of liberal Democrats tired of losing elections, but recently David Brooks has approvingly quoted David Frum's recent book that tells Republicans that the tax issue no longer wins votes and should be abandoned for winning issues like raising taxes on energy to placate those concerned with global warming.
One presumes that Brooks and Frum are not deliberately trying to destroy the modern Republican party, but their advice, if taken, would do just that.
Rather than receding, the tax issue has moved front and center in the 2008 election and remains the central issue dividing the two political coalitions in American politics. The modern Reagan Republican party is a coalition of groups and individuals that on their primary, vote-moving issue want one thing from the government: to be left alone. The largest block of Republican voters want their homes, incomes, businesses and pensions left alone by the tax collectors
John McCain won the Republican nomination not simply promising to make the tax cuts permanent and veto any new tax increase, but to fight to reduce the corporate tax rate from 35 percent to 25 percent and to expense all business investment. Why did he focus on tax cuts on businesses?
The tax debate of the 1980s focused on supply-side tax reductions. Reagan took office with a top marginal tax rate of 70 percent and left town in 1989 with the top rate for individuals at 28 percent. Pre-Reagan working for an extra $100 on Saturday netted you 30 dollars after tax. Post-Reagan you took home 72 dollars of the last $100 earned. The marginal reward to work was more than doubled and the Reagan years saw individuals working more hours and 15.4 million jobs were added to the economy.
Some argue that with the top marginal tax rate at half its pre-Reagan rates--35 percent rather than 70 percent--the political effectiveness of tax reductions might be lower.
But the growth in the investor class--those Americans who own shares of stock directly in their mutual funds and 40lk's have strengthened the power of the tax issue. When Reagan was elected only 20 percent of Americans owned stock. Today the number is more than 60 percent of adults.
This growth in the number of Americans who own stock directly makes the tax issue more important for two reasons: first, taxes on businesses, once taxes on "the other" are now more transparently taxes on most Americans. Second, taxes on businesses have a wealth effect. The same Fortune 500 company facing a 35 percent dividend tax has one value. Cut the dividend tax to 15 percent and the stock of the company increases. When the 2003 tax cut brought the capital gains and dividend tax rate to 15 percent the Dow Jones stock market rose from 8454 on May 1, 2003 to a peak of 14,165 on October 9, 2007 As we approach a return to higher taxes on capital gains and dividends in January 2011the stock market will continue to drift down in anticipation.
Today 194 Republican members of the House and 42 GOP Senators including John McCain have signed the Taxpayer Protection Pledge and promised to oppose and vote against any and all tax hikes. As a result there has not been a tax hike in Washington since Bill Clinton's tax hike of 1993. This is the longest period of American history without a national tax increase. The last eight years have seen at least one tax cut enacted each year--15 in total.
Now the Sword of Damocles hangs over American taxpayers--the largest tax hike in history looms in the lapsing of the 200l and 2003 tax rate reductions. Add to that the competing threats of both Hillary Clinton and Obama to add other tax hikes to their opening bid of two trillion dollars in higher taxes by ending the Bush tax cuts. Walter Mondale was not that bold.
This year the giddy competition between Obama and Clinton to promise higher taxes to fund their "Takings Coalition" and the Calendar itself conspire to bring taxes front and center.