In his usual provocative manner, Paul Krugman reminded us yesterday that, according to a recent study by Alan Blinder and Mark Watson, ever since President Truman the economy has grown faster under Democratic presidents than under Republican presidents. There are a lot of different explanations for this, not necessarily demonstrating better economic policies by Democratic presidents. Nevertheless, it is a noteworthy finding which fiscally conservative, fix-the-economy types, need to be aware of.
Among other things, Republican presidential candidates must become more credible about their economic policies than they have been so far. They have all proposed big cuts in tax rates to stimulate the economy. But their plans lose trillions of dollars in tax revenue. At a time of huge deficits and a rapidly growing national debt this is simply unacceptable.
In today’s Omaha World Herald, the economics journalist, Robert Samuelson, reports on a new Brookings Institute study about the effect of raising the top individual tax rate from 39.6% to 50%. Such a tax hike would raise as much as $100 billion per year.
- However, if used to lower deficit spending, it would cover less than ¼ of current deficit spending ($439 billion in 2015, for example).
- If used to reduce income inequality for the poorest 1/5 of Americans, it would give such households an average of $2,650, and the overall effect on income inequality would be very modest.
The point is that neither costly tax cuts to boost economic growth nor a sizable tax increase on the wealthiest Americans represents a viable program to straighten out our economic problems. What we need to grow the economy is:
- Revenue neutral tax reform, lowering rates across the board, paid for by closing loopholes and shrinking deductions.
- Lightening the regulatory burden at least on small and mid-size businesses in order to speed up business growth and entrepreneurship.
- Trade expansion and immigration reform to increase productivity.
Fiscal conservatives are badly needed to implement such policies effectively but neither party can get the job done alone. It will take both parties working together to make progress.