Trump Will Reinvigorate NATO

In many precincts, there is this misleading suggestion that Donald Trump is backing off of America’s traditional support for NATO, a claim undermined by a reading of his actual position. Joint security pacts are only sustainable when all participants have security capabilities; Trump gets this. That is why NATO calls for each nation to spend 2% of GDP on defense to avoid free-riders. Otherwise, nations can rely on the defense capabilities of other nations. That isn’t collective security; it is one country providing a free, outsourced military for others.

Sadly, many nations are not spending the 2%, instead benefiting from the U.S. security umbrella without pulling their weight. That is unsustainable; even President Obama has called for more defense spending from NATO allies. Alliances, like personal friendships, are two-way streets. States like Estonia and Poland are meeting the minimum while those like Italy and Spain are in default. Italy, a wealthy country, spends less than 1% of GDP on defense. Germany, home to Europe’s top economy, is little better at a meager 1.2%. Relatively poor countries like Poland, Estonia, and Greece are meeting their NATO requirement while wealthy European states are gladly allowing their military to atrophy, enjoying a defense apparatus subsidized by the American taxpayer who is already carrying over $19 trillion in national debt.

Trump recognizes the 2% minimum is useless without enforcement mechanisms. Unless there are consequences for failing to spend 2% (either a fine or loss of membership), European nations will continue to ignore the requirement. Trump’s plan would simply put in penalties for falling short of 2% and would reinvigorate NATO. By forcing Europe to invest its military and thereby reconfirm its commitment to joint security, the alliance will be stronger and could more easily deter Russia. Putin sees a Europe with decaying powers and weak militaries; it is no wonder he is pursuing expansion. A weak Europe has given Putin room to expand, and by being lax on NATO enforcement, we have allowed Europe to weaken. Given NATO’s reliance on American power, we alone have the leverage to get the 23 members who inadequately invest in defense to meet their commitment. The result will be an energized NATO that makes Eastern Europe more not less safe.

Trump’s push for more NATO spending is the only way to stand up to Putin and protect our allies. Islamic terror, an Expansionist Russia, and a strengthening Iran are global problems. They require global responses. Europe should recognize this, especially after a string of terrorist attacks have hit Belgium, France, and now even Germany. Our current policy of blindly subsidizing many European powers has turned NATO from a collective defense pact into a bunch of nations free-riding on the US (and to a lesser extent the UK, Poland, Estonia, and Greece who are spending the 2%). Our European partners need to determine whether they want to help provide and enjoy collective security and meet their commitments.

Trump’s policy will return NATO to its original promise-a transatlantic alliance of democracies all providing for the security of each other. That will make NATO stronger and its collective defense mechanism more credible. Putin will no longer be able to devour the decaying carcass of Europe; instead, the Continent will be able to deter Putin and other aspiring powers like Russia and China. We can then deal with these nations from a position of strength, striking deals when possible and pushing back when necessary. America and the world will be better for it.

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National Review’s Useless, Misguided War on Trump

On Thursday night, National Review launched a broadside on Republican frontrunner Donald Trump, urging voters to shun him, and the editors solicited editorials from 22 prominent conservative personalities doing the same. The editorials range from well-reasoned critiques to unhinged attacks, culminating in this final take from the editors: “Donald Trump is a menace to American conservatism who would take the work of generations and trample it underfoot in behalf of a populism as heedless and crude as the Donald himself.” Sadly, these editorials are little more than a shout into the anti-Trump echo chamber rather than being a compelling argument to current Trump supporters that they should support someone else. All this does is allow members of a pundit class which too often criticizes rather than offer solutions (criticizing is far easier) to feel comfortable that at least they “warned the base” while staring aghast at the popular will of voters (at least according to current public polling).

For years, conservatives have rightly lambasted liberal media bias because straight news should be delivered without opinion and opinion pieces should be fair and rooted in reality (ie just because a piece is “opinion” does not make the use of misleading statistics to validate a point justified). However, we must apply the same scrutiny to biases we agree with as with bias we disagree with it. On this account, hypocrisy (on both sides) run rampant because it is easier to forgive the missteps of kindred souls. Sadly, personal dislike towards the subject can lower the quality of discourse, and on this count, it does feel like authors of this “National Review Symposium” are suffering a bit from Trump Derangement Syndrome, letting personal animus bleed into their writings, causing them to overstate their case and the danger Trump poses.

I am no Trump supporter and am extremely unlikely to vote for him in a primary (though at this stage, I would support him in a general election vs. Hillary Clinton), but I still feel like we should be fair to him. It is increasingly difficult to find such analysis; there is merely hate and love, few rational pieces. My main sticking point with Trump is his “Muslim ban,” which to me manages to be impractical, irrational, and immoral, but one can feel that way while agreeing with him that politicians are beholden to the donor class. changed his mind. Any voter is free to find these answers unsatisfactory and choose someone else; however, I question the sweeping argument that those “new” to conservatism are unfit to lead it. With the standard caveat that Trump is no Ronald Reagan, the fact is Reagan was an FDR-supporting, New Deal Democrat who left the party in 1962 and ran as a conservative for California Governor in 1966. Based on the arguments in the symposium, it seems the writers would have opposed Reagan in 1966, questioning his sincerity. In fact, I hope they would have; otherwise, they would be holding Trump to a different standard, which is unfair. As Reagan showed though, sometimes betting on a new face can work very well.

Voting for Trump is definitely a wager, given his flip-flops, but he is not alone on this account. Rubio and Cruz are first-term Senators (like Obama) with no major accomplishments in the Senate—voting for them is clearly a gamble. Jeb Bush hasn’t held office for a decade and is comically inept at making an argument. An effective user of the bully pulpit he would not be. Christie’s second term has left much to be desired. In my estimation, Kasich has the strongest record, though some will question his Medicaid expansion (full disclosure: I have donated to the Kasich campaign). Candidates are human beings; they will be flawed. Voters must decide what assets they seek and what flaws are acceptable. It is easy to oppose candidates by focusing on the flaws, which is what National Review did on Trump. Did the writers have the willingness to stand together and support someone else? Of course not. That’d be hard.

Much of the attack on Trump continues to center around his populism, which just boggles the mind. If a candidate isn’t focused on improving the lives of working people and middle class, why are they running? Rather than attack Trump personally, which will merely cause his supporters to tune out, we should embrace his populist focus but argue that different solutions will help Americans more. For instance, a bigger EITC and more progressive code would be a more effective tax plan than Trump’s. On this front, the symposium comes up woefully short. Trump plans are attacked but alternative are not offered. What’s the point of this? Even if Trump’s plans stink, what’s to say others have better plans? After all, Cruz’s European VAT plan is seemingly designed to hurt workers to the benefit of corporations and their owners (read: donors). All we hear from most candidates is a rehash of 1980 economic policy as though the problems have not changed since then. Trump is one of the few to be intellectually honest enough to suggest we try some different policies.

In particular, they signal out Trump’s trade rhetoric, and while not all of his China claims are backed by fact, toughness with China and the threat of some trade restrictions are not inherently anti-conservative. Chinese companies steal our intellectual property, often don’t pay what they owe American companies, get state sponsorship, and the government hacks into our companies to steal trade secrets. While we focus on the currency that is the least egregious thing China does. Should we ignore these actions, which have hurt American workers, in the name of free trade? That seems asinine. Ultimately, the President’s job is to better the country. Heck, even Reagan expanded farm subsidies for exports to the Soviet Union to help U.S. farmers. The rise of China has greatly lowered U.S. inflation, thereby increasing growth indirectly by boosting our purchasing power, but it has not driven much growth directly. Unless, the other country plays fair, free trade for the sake of it isn’t wise or good for the public. That does not mean a 45% tariff is the right policy response, just that mindlessly supporting free trade is neither conservative nor good policy.

Absolute rigidity is a sign of intellectual smallness not of adherence to principles. Opposing the bank bailouts of 2008 (which turned a profit, mind you) is not conservative; they saved this country from Depression. They are one of the few economic policies for which George Bush deserves praise. To criticize Trump for supporting them is laughable. Maybe letting the financial system implode is theoretically conservative, but how is ruining the lives of 100 million people the right thing to do? Again, it is easy to shout from the bleachers when you don’t have to solve the mess transpiring on the field.

Trump is the only leading candidate who consistently speaks to the needs of the middle and working class, demographics the GOP desperately needs to do better with, and there is a greater battle in conservativism here. While Trump is out of the orthodoxy on many issues, many “conservative” intellectuals and politicians have abandoned conservative’s populist roots over the past 15 years, focusing too much on top marginal tax rates, defending things like the carried interest loophole, and emphasizing the elimination of the estate tax. Fundamentally, conservatism is rooted in an optimism of the capacity of ordinary people, which is why we prefer to leave them with power rather than hoard the power among a band of so-called experts within government. In some circles, this optimism in the public has morphed into a simple disdain for government and emphasis on total adherence to principles.

There is a greater war within conservatism between the doctrinaire elites (think George Will) and the pragmatic populists (think Bill O’Reilly), and this National Review-Trump feud is just the latest battle. Trump is an imperfect vessel for his side but the sneering of NRO won’t sway anyone, just entrench both sides further. Being a doctrinaire is easy when on the sidelines critiquing those in the arena, but the fact remains that at the federal level, establishment conservatives and liberals have failed for 15 years to help the middle class. America does its best when pragmatic populists like Reagan lead it, and we should hope this side wins the war for conservatism.

At least Trump is emphasizing the needs of workers. That’s more than most candidates can say. Let’s embrace his focus, prove to those making under $50,000 that conservatives actually care about them (which we have failed to do), and offer different, compelling solutions. What the National Review did surely helped to stroke egos, but it didn’t boost the discourse. It’s high time we realize conservatism’s failures post-Reagan have created Trump. He’s a reminder we’ve lost our way. Directing our ire at him is a waste of time, direct it at the leaders (ie George W Bush), pundits (George Will), and rent-seeking donors whose intellectual rigidity and outdated policies have failed.

Median wages are lower than 15 years ago. Unlike Trump, that is actually something to be embarrassed about and have an emergency symposium on.

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What Happened to Optimistic Conservatism

Over the past week, we have witnessed the Obama Presidency collapse upon itself. From the attacks in Paris showcasing how we have underestimated ISIS, to the fact Iran has increased its stockpile of enriched uranium since agreeing to the nuclear deal, to UnitedHeath considering exiting Obamacare exchanges due to massive losses. Even a key Obamacare architect concedes the insurance plans stink and that costs haven’t been controlled. All the while, Obama, the man who ran promising to end the politics of old and unify the country, has taken his rhetoric to new lows, suggesting Republicans are ISIS recruiters while dismissing a terrorist attacks as a “setback.” The President apparently thinks failings are due to the fact the office of the Presidency “is weak.” A more likely explanation? The man in the office is weak.

In 2016, the Democrats will almost certainly put forth Hillary Clinton who helped architect our naïve and misguided foreign policy that is in total ruin. On top of this, her forthrightness on the issues leaves just a bit to be desired. Given failed policies and the historical challenges of winning three straight terms, 2016 should be a prime opportunity for conservatives to retake the White House and set the country back on a proper trajectory. Polls this far in advance are of little import but show a close and very winnable race, yet I fear there is increasing reason to be worried that once again we will steal defeat from the jaws of victory.

Before your eyes glaze over in anticipation of reading the 14,714th piece on how the GOP needs to do better with Hispanics or women, that is not my focus (either you agree or disagree with that argument, nothing I say will sway you). My concern is more fundamental. The republican electorate is increasingly pessimistic about the future of the country. Conservativism is an innately optimistic political philosophy, and we need to instill optimism if we are going to win. Yet according to the Public Religion Research Institute (in a poll of 2,700), only 41% of republicans and 33% of Tea Party members think America’s best days are ahead of us.

Image-14

Clearly, the disaster that is the Obama Presidency is weighing on sentiment, and that isn’t surprising; voters’ anger is palpable. At the same time, republican candidates can’t merely play into this pessimism; they need to offer a compelling and hopeful vision about the future. This was a key failure (there were several) in Mitt Romney’s 2012 campaign. While he prosecuted the case against Obama well, he did not articulate what he would do going forward in a compelling fashion (which boggles the mind given how gifted his running mate, Paul Ryan, is at doing precisely that). It is a fatal error to take a pessimistic tone to voters because it is at odds with our beliefs. Liberals are pessimists at heart, though Obama did a masterful job in 2008 portraying himself as an optimist, helping win the nomination and cruise to the Presidency. I would argue that ultimately voters, even angry ones, want to believe better days for the nation are ahead. To give this ground is mistaken, particularly when our future actually is bright. Saying better days are ahead isn’t merely wise politics, it happens to be the truth! We are too great a nation to accept inevitable decline.

To be conservative is to believe that power and decision-making is best left in the hands of individuals through lower taxation, less regulation, and local control. In other words, we think ordinary people make better decisions than a bunch of so-called experts in a centralized bureaucracy, which implies a positive view of the competence and judgment of people. To support more control at a centralized level, as liberals propose, suggests they don’t trust the public to make decisions. Generally, one thinks less of a person whom one does not trust. This dichotomy is the core disagreement between liberalism and conservatism: do you put your faith in people of bureaucracy? Whether you have a positive or negative view of the public’s competence is a driver of your answer. If you have confidence in the public (as conservatives inherently do), it is then questionable to think the nation’s best days are in the rear view mirror.

This optimist/pessimist divide permeates further. Liberals are now obsessively focused with income inequality. They have all but written off attempts to grow the pie and are laser-focused on re-slicing it. They see an America that can’t be the global leader (heck, Hillary Clinton doesn’t even think the US should lead the fight against ISIS), as though our time as a Super Power able to roll back the evil of communism was a mere flash in the pan, destined to burn out. The core of the democratic platform is basically: we can’t grow so let’s take from the rich to help the poor and abdicate global leadership. This is the platform of people who think America’s best days are behind it. It is also the path of Europe, which chose to enter blissful decline 40 years ago (though it is now realizing that decline isn’t so blissful when debts are high and innovation lacking) and is now on a path to irrelevance in global affairs.

It is still early, but republican candidates have not done a particularly good job laying out an optimistic vision. Much of this is due to the Donald Trump phenomenon. He spends much of his time tearing down opponents, and his policy statements are negative like “wages [are] too high” or “the American dream is dead” (both from the Fox Business Debate…Trump has subsequently claimed he was only speaking to the minimum wage, though he repeated the wage line elsewhere). The recent controversy over a national Muslim registry shows a candidate who plays to our worst fears rather than our greater aspirations. Given multiple chances to walk back that statement, Trump continues to suggest an openness to it, most recently on This Week. Let’s be clear: rounding up and registering people of a certain faith isn’t conservative, it is evil, cruel, and fascist. For a candidate pledging to “make America great again,” it would be hard to argue Trump has run a hopeful, optimistic campaign, and in the process, he has lowered the discourse in our primary debate. I would suggest other candidates like Ted Cruz have let anger overwhelm optimism, and many who are supposed optimists like Jeb Bush come across as impotent. In fairness, Marco Rubio has been the candidate who has done the best job in the field laying out an optimistic vision for the country.

In particular, he has turned the immigration issue on its head to prove the greatness of the country. From The O’Reilly Factor: “I think America is great. You know how I know it’s great? You don’t have American refugees winding up on the shores of other countries. You actually have people wanting their children born here. America is a great country. The issue is: We could be even greater. We are not fulfilling our potential.” Conservatives everywhere should copy this down.

Now, admittedly, it can be challenging to put forth an optimistic vision when the other party is in control because if things are going so great, you should stick with them. There is a necessary balancing between saying things not being great today but have the capacity to be great in the not too distant future. There is a nuance to it that can be lost in a news cycle obsessed with 30 second soundbites. While I caution republicans from discussing the Reagan legacy too much since most Americans did not vote in the 1980 election (it was 35 year ago), there are lessons in his rhetoric that are still applicable. He succinctly framed all elections in one simple question: “Are you better off than you were four years ago?” This is an excerpt of his answer in that debate with President Carter (emphasis my own):

This country doesn’t have to be in the shape that it is in. We do not have to go on sharing in scarcity with the country getting worse off, with unemployment growing. We talk about the unemployment lines. If all of the unemployed today were in a single line allowing two feet for each of them, that line would reach from New York City to Los Angeles, California. All of this can be cured and all of it can be solved…I would like to have a crusade today, and I would like to lead that crusade with your help. And it would be one to take Government off the backs of the great people of this country, and turn you loose again to do those things that I know you can do so well, because you did them and made this country great. Thank you.

Reagan’s campaign was predicated on the argument the American people were great, and it was the government holding them back. By rolling back government and freeing the public from the shackles of high taxes, regulation and inflation, the country would flourish again. His was a campaign of hope not hatred, appealing to the intrinsic decency and aspiration of every individual. It was a theme he expounded upon in his Inaugural Address (emphasis added):

It is no coincidence that our present troubles parallel and are proportionate to the intervention and intrusion in our lives that result from unnecessary and excessive growth of government. It is time for us to realize that we’re too great a nation to limit ourselves to small dreams. We’re not, as some would have us believe, doomed to an inevitable decline. I do not believe in a fate that will fall on us no matter what we do. I do believe in a fate that will fall on us if we do nothing. So, with all the creative energy at our command, let us begin an era of national renewal. Let us renew our determination, our courage, and our strength. And let us renew our faith and our hope.

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. Your dreams, your hopes, your goals are going to be the dreams, the hopes, and the goals of this administration, so help me God.

This optimism and unyielding faith in American public was the cornerstone of Reagan’s political philosophy and career. It is only fitting that in his final remarks to a Republican Convention in 1992, he poetically ratified this political doctrine (emphasis added):

A fellow named James Allen once wrote in his diary, “Many thinking people believe America has seen its best days.” He wrote that July 26, 1775. There are still those who believe America is weakening; that our glory was the brief flash of time called the 20th Century; that ours was a burst of greatness too bright and brilliant to sustain; that America’s purpose is past.

My friends, I utterly reject those views. That’s not the America we know. We were meant to be masters of destiny, not victims of fate. Who among us would trade America’s future for that of any other country in the world? And who could possibly have so little faith in our America that they would trade our tomorrows for our yesterdays?

Republican candidates and pundits can spend so much time waxing nostalgically about the Reagan era it can feel like they would trade our future for our past. This tendency, coupled with such an angry, divisive campaign, can leave people thinking the best is behind us, especially considering the crumbling of the Obama Presidency we are witnessing. This is a problem, and we will not win if we cannot put forward a credible and compelling vision for the country. Unfortunately, we are constantly sidetracked by the boorish shenanigans of Trump who is either lobbing insults, threatening to sue, or more recently maligning Muslims. We are a movement that believes in Shining Cities not Gestapos, and he is a charlatan masquerading as a conservative. We need to start aggressively calling him out for it.

Democrats have mastered identity politics, dividing voters against each other to cobble together winning coalitions. To combat this, republicans shouldn’t try to beat them at their own game but offer a unifying message, which is more constructive when it comes to actually governing. Rather than betting on government to manage the decline, I want to bet on the public to make this a better country. It has been a winning bet for over two centuries, and while we are suffering from abject incompetence in the White House, I see no reason to stop placing this bet. Where are the world’s greatest new companies from Facebook to Uber built? What country has the most hard-working, innovative citizenry? What country serves as the inspiration for the oppressed in the world? The questions can go on and on, but the answer remains the same: the United States.

Do we have challenges? Obviously, from a broken entitlement system to stagnant wages to an aggressive China and resurgent Russia. These challenges are not unusually grave, and we are better positioned than any other country on the earth with a better mix of personal freedom, economic ingenuity, military might, and demographics than any other nation. Without a shadow of a doubt, our best days are ahead of us. Decline is a choice not a sentence. Conservatives need to renew our faith in the future of the country. There is no reason for 58% of republican voters to feel like our best days are behind us. That is a failure of our political leadership to lay out a compelling vision. We need to move away from angry rhetoric, rebuke Trump’s asinine assertions, and once again explain our faith in the American people and how returning money and power to them can undo the damage Obama has done.

Pessimistic conservatism is a non-starter and ideologically inconsistent. We can express anger at the failings of the Obama/Clinton policies while also pivoting to an optimistic agenda that ensures brighter days are ahead. It’s the only way to win.

Taxing in the 21st Century

Several Republican Presidential candidates (Trump, Bush, Rubio, Paul, Kasich, Jindal, Santorum, and Cruz to name a few) have outlined fairly specific tax plans aimed at accelerating U.S. economic growth. Most follow a similar pattern of eliminating deductions and lowering rates, which has worked quite well in the past (the Reagan Recovery being the standout example as seen in Chart 1). While the impulse to dust off the Reagan playbook is quite strong given the empirical data, conservatives really need to aggressively rethink how we tax and be careful not to knee-jerk back to past solutions. It is on this point where Sen. Ted Cruz’s tax plan stands out and should be applauded. While I have reservations about how the specifics of his tax plan, he has shown the greatest willingness to move away from the orthodoxy and rethink the nature of our tax code (more on his plan will follow)

Chart 1

r v o vc

With each passing day, the Reagan era grows more distant (an admitted redundancy that is still important to remember), and reflexively returning to his playbook is fraught with political danger (more and more voters were not old enough to cast a ballot for him) and policy danger. Conservatives need to do a better job delineating solutions from principles. Principles are what we believe (and as such are relatively unchanging) whereas solutions are how we implement principles (and as such change as the problems change). It is a disservice to Reagan’s legacy to simply suggest cutting marginal rates is the best answer to a slow economy as this implies there is a magic formula that would solve any problem.

The genius of the Reagan Administration was its ability to take conservative principles and apply them to policies to craft specific solutions to the problems of the day. We need to keep these principles, but today’s problems may necessitate different solutions. In brief as conservatives, we believe in returning power to the individual and away from the collective. Ultimately, individuals make better decisions regarding their own lives than a bunch of bureaucrats can hope to. This means entrusting power in the people and keeping government interference to a minimum.

Armed with these beliefs, Reagan focused his tax relief on capital. In 1981, the US was suffering from high unemployment and high inflation (stagflation). Reagan took over an economy that was treating capital poorly. As can be seen in the following chart, labor was gaining share in the economy—at the expense of capital, leading to a retrenchment in investment. There was a supply of capital crisis. When capital is treated poorly (ie 70% marginal tax rates and windfall profit taxes), holders of capital are less likely to invest it. When you don’t see capital investment, an economy grows too tight, sending prices skyrocketing (Chart 3, NB inflation is inverted). As prices soared, consumer confidence fell, leading to less spending and subsequently an even worse environment for investing.

Chart 2

obama econ

Chart 3

pce

Recognizing the supply problem the economy faced, Reagan freed up capital by rolling back regulations and focusing tax cuts on top marginal rates (bringing them down from 70% to 50% and later 28%). Reagan’s capital-aimed economic policies worked remarkably well, bringing inflation down and consumer confidence back (Chart 3) while economic growth soared (Chart 1). Reagan took conservative principles (empowering the individual rather than the collective) and applied them to the problems of the day (unfavorable policies inhibiting capital and causing an inflation shock) to create policies that bettered the lives of Americans.

Fast-forwarding to the present day, we have conservatives offering a variety of tax plans aiming to spur growth. When looking at tax plans, we need to drill down to the basics and ask the question: why we tax? The answer is simple: to fund government expenditures. There are some things government must spend money on (ie defense), and we cannot sustainably borrow money to pay for everything. Depending on the speed one wants to bring down our debt load, tax revenue likely needs to be 17.5-20.5% of GDP on average over the medium term.

It then becomes a matter of constructing a tax code that has the best impact on the economy over the medium term. In a sense, offering a tax break to one group needs to be offset by taxing another group; for instance, opting against an estate tax (which many conservatives call for) would cost revenue that needs to be made up elsewhere. On the other hand, eliminating ineffective deductions (the deductibility of corporate interest expense perhaps?) helps to fund tax breaks elsewhere. Ultimately, we would build a tax system that generates the necessary revenue while having the best economic impact, and this tax code could be dramatically different from our current convoluted mess (spoiler alert: it would be).

Most importantly, the efficient tax code would change over time because our economy is ever-changing. While conservatives should continue to push for as low of a tax burden as possible with a simple code that leaves individuals with as much power as possible, how that translates into marginal rates, deductions, and so forth can change a bit. Reagan faced an economy that treated capital poorly, and so, he lessened capital’s tax burden. Today’s economy is far different. Under Obama (as you can see in Chart 2), labor has done absolutely terrible, losing share to capital. This decline helps to explain why aggregate economic statistics (like 5% unemployment) seem out of whack with how most in the middle class feel. As such, it is critical to build a tax code that incentivizes work to get people back into the work force and working. This requires creative thinking from expanding the earned income tax credit, to contemplating the implications of a negative marginal tax rate bracket, and closing loopholes that provide little economic bang for the buck.

On the whole, it is hard to look at most of the Republican tax plans and not believe they would be better than the status quo, though none is without flaws. Most plans (like Rubio, Bush, and Kasich) stick relatively close to traditional conservative orthodoxy, but Cruz’s stands out. Cruz basically throws out the current system, has a 10% income flat tax, and a 16% business flat tax. Per the Tax Foundation, the Cruz plan costs about $3.6 trillion over a decade, but based on their view that the economy will be 13% larger (a plausible but definitely not unfriendly view), they see it only costing $770 billion. The US, in aggregate, is certainly not under-taxed, so there is nothing wrong with a tax plan that offers a moderate tax cut like Cruz’s does. I would note (that based on my rudimentary number-crunching) most of the growth driven revenue gains would be realized at the back end of the decade with years 9 and 10 generating up to $1 trillion of the incremental $2.8 trillion in revenue. Essentially, the revenue hit is not $77 billion/year, rather, it is much larger upfront and shrinks, possibly even gaining revenue at the tail end.

At first glance, it looks like Cruz provides labor with a massive tax cut, given the low 10% rate that for a family of 4 kicks in after 36k. However, his business tax would tax both profits and payrolls. So an employee earning $100,000 would pay a 10% flat tax, but his employer would also pay a 16% tax ($16,000). Under current law, the Social Security payroll tax is only 6.2%, so Cruz is really using a tax increase on payrolls to fund cuts elsewhere. Frankly relative to current law, Cruz is providing a dis-incentive to employee people.

Alongside this, Cruz would allow for the immediate expensing of equipment. Put in simple terms, buying a robot would not be subject to a 16% tax but hiring a worker would be. We continue to see a push towards automation in the economy. While painful for the worker being automated out, this is a good thing. I think we would all agree that on net ATMs have been a positive, even though they were a negative for bank tellers. Businesses should automate when the underlying economics make sense, but we don’t want decisions being made for tax purposes. An economy functions most efficiently when capital is allocated based on underlying economics and not tax implications. When taxes start changing allocation decisions, a government is picking winners and losers, which more often than not ends badly (how’d that Solyndra loan work out?).

Now, the government should not actively impede automation as this would leave the US poorly positioned in world trade and slow growth. The tax code should be neutral on the matter, and let economic reality be the determinant. Amazingly, this is one of the few things our current code does somewhat well. Employers pay a payroll tax but can deduct payroll immediately while purchases of equipment are deducted over multiple years (ignoring temporary tax breaks). When calculating the present value of the tax implications of the decision (a worker or machine), they roughly cancel out (or come fairly close), meaning that business owner would choose the economically wisest.

Cruz’s plan tilts the playing field away from workers and towards capital, incentivizing automation. Now if the pre-tax economics of hiring a worker or automating are the same, a business would choose to automate because it receives more favorable tax treatment. Interestingly, there is a pretty good case to be made that this plan would have worked particularly well in 1980 when the cost of capital was too high. Similar to Reagan’s steep marginal rate cuts, the Cruz plan would incentivize investing and have increased aggregate supply to bring inflation under control.

While Cruz’s plan benefits from original thinking, it solves past problems and would likely exacerbate the trend in chart 2 where labor has lost ground under Obama. This is one reason why I think the Tax Foundation’s growth expectations could be a bit optimistic. The Foundation does say the capital stock rises 44%, which makes sense as lower taxation would create more capital. The fact it grows 3x the economy does show the diminishing return of excess capital in the current environment. In fact, the issues with our capital stock could be dealt with more simply and just as effectively in two strokes. First, stop taxing repatriated profits at 35%, which would bring back $2 trillion. Second, Dodd-Frank has disincentivized bank lending, and as such, banks are carrying $2.5 trillion in excess cash. Roll back some of these regulations, and banks would be free to increase lending to small business and others, which would push growth faster.

Cruz (and others) are fighting the last war, focusing tax cuts in places where they will provide less growth. Reagan’s ingenuity was not that he lowered taxes but that he recognized the problems he was facing and structured his tax cuts in a way to solve those problems. Labor and capital supply an economy, and he faced a capital crisis. By fixing that, he put us on a path for 25 years of prosperity. Today, capital is doing well, and our crisis is on the labor front. Labor force participation is lower than it should be, wage stagnation is real, and capital has done fairly well with the top doing very well under Obama (who has helped exacerbate the very inequality he rails against). Again, the solution to this problem is not to punish the top to subsidize everyone else as that slows growth over time. However while Reagan tried to stimulate capital, we need to stimulate labor. This means debating a larger EITC, considering negative marginal rates, incentivizing job training, and eliminating certain loopholes (like carried interest and interest deductibility) to fund lower marginal rates. It also means keeping capital gains taxes and rethinking total opposition to the estate tax (or at least the stepped-up basis).

Reagan’s principles and the tenets of supply-side economics are as relevant as ever, but conservatives need to engage in further debate about how those principles apply to today’s challenges. The best answer could be wholesale change to the tax code (like Cruz has boldly suggested) or sticking a bit closer to the status quo. Taxes at the end of the day are a means to an end, a way to fund government while creating the conditions for the most robust growth. This requires an analysis of what breaks provide the least value and what taxes slow growth the most in today’s economy (and then eliminating those breaks to fund the elimination of those taxes!). It also requires a deeper debate on what part of the supply curve needs the stimulus. Admittedly, stimulating labor, without doing so at the expense of capital, is a challenge but not an insurmountable one (pairing labor-focused cuts with fewer deductions, a quasi-territorial corporate system, modified Dodd-Frank, and reformed estate tax is our best bet in my estimation).

Conservatives need to do a better job explaining how our principles and faith in the American people rather than government translate into solutions for today and are not merely regurgitated answers to the problems of 35 years ago. That is a pre-requisite for winning elections, and more importantly, it is the only way to actually make the American public better off. Re-examining our tax orthodoxy is a good place to start. Hats off to Senator Cruz for doing just that. While I would question the specifics of his plan, he is starting a debate we very much need to have.