March 22nd, 2018


The tax bill won't matter when it's time to vote

Ramesh Ponnuru

By Ramesh Ponnuru

Published Dec. 12, 2017

The tax bill won't matter when it's time to vote

"There's nothing wrong with supply-side economics that division by ten wouldn't cure."

The quip came from Charles Schultze, the chairman of the Council of Economic Advisers in Democrat Jimmy Carter's White House. It meant that improving incentives to work and invest would promote economic growth - but not nearly as much as tax-cutting enthusiasts believed. The point applies to the politics of tax cuts, too. Both parties are exaggerating the impact the tax bill making its way through Congress is likely to have in the next elections.

A lot of Republicans on Capitol Hill think passing a tax cut is vital to their re-election chances. They believe it will show that they can accomplish something, reassuring their core supporters.

"Doing nothing, you're running as the gang that couldn't shoot straight," former Republican congressman Tom Davis tells me. They also think that voters will appreciate the higher take-home pay they will get as withholding tables are adjusted for the new tax code.

Finally, many Republicans believe that the bill will boost their candidates by amping up economic growth. It's a theory that conservatives have often invoked when arguing among themselves about how to design the bill. FreedomWorks, a conservative group, warned Senate Republicans, "If we don't make the corporate tax rate reduction immediate, Americans won't see the impact of economic growth and job creation by November 2018."

All of these effects are likely to be small. Not everyone who gets a tax cut is going to realize it. President George W. Bush cut taxes twice during his first term, in a less complicated way than the current tax bill does. Yet when he ran for re-election, only a fifth of voters believed he had cut their taxes.

It's true that one detailed analysis of the Senate tax bill shows it significantly boosting growth in 2018. Contrary to the FreedomWorks forecast, it's the delay in the reduction of the corporate tax rate that generates the extra growth.

The bill lets companies write off the full cost of their investments in 2018 -- creating a more powerful incentive to invest when the tax rate is higher. Strong growth usually helps the party in power. But we may be living through a time that is an exception to that rule. The economy has been doing pretty well already, while President Donald Trump is unpopular and getting more so.

Democrats, meanwhile, may be overestimating how much the unpopularity of the tax bill will matter in the next election. For example, Chris Cillizza of CNN looks at survey data and concludes that "the Republican tax bill is a major motivator for Democratic base voters" and will "drive Democrats to the polls to show their anger and disapproval."

Such data can be misleading, though, because a lot of those angry Democrats would be angry about something else in the absence of that tax bill. Or about someone else: Trump as president may be motivation enough for Democrats to vote.

What may help the Democrats is not the bill's overall unpopularity but its unpopularity with a specific group: relatively affluent voters in high-tax states. Both the House and the Senate versions of tax reform scale back the deduction for state and local taxes, resulting in a net tax increase for many of these voters - who have already been turning away from the Trump-era Republican Party.

What may help the Republicans, on the other hand, is that passing the tax bill will give them something to say for themselves. Next fall they may be able to say that the economy is booming and that they helped it get that way. Whether they will be right or wrong about it, it's the best argument they are likely to have at their disposal. Republicans in competitive races are probably not going to want to talk about the president's Twitter feed instead.

Passing a tax bill looks likely to be the major legislative accomplishment of this Congress. That doesn't mean it's going to be a dominant issue in the election. My guess is that passing it will be a modest net plus for Republicans. But whatever you think the political effect will be, divide it by 10.

Comment by clicking here.

Ramesh Ponnuru has covered national politics and public policy for 18 years. He is an author and Bloomberg View columnist.