It’s Time to Back Trump

Within the political and chattering class, some conservatives, describing themselves as part of the “Never Trump” movement, have attacked Donald Trump as a threat to the republic and the conservative movement while attacking GOP leaders who support him, like Marco Rubio and Paul Ryan, as sell-outs or charlatans. These attacks couldn’t be further from the truth. Most recently, Ohio Governor John Kasich has been generating headlines by distancing himself further from Trump, in an attempt to lay the groundwork for another run for the Presidency in 2020. Conservatives need to recognize that much, though not all, of what Trump has run on represents the future, not the demise, of the conservative movement. While he is an imperfect messenger, Hillary Clinton would likely do irreversible harm to this country, which is why conservatives must back Trump.

In April 1998, there were 17.64 million Americans working in the manufacturing sector; today that number is 12.28 million. Put another way, we’ve lost 800 jobs every day for 18 years. During this time, real median incomes have fallen, and the African-American poverty rate languishes over 25%.

The typical working American is worse off today than at the turn of the century; for this, both parties share blame. While economists focus on the lost decades nations like Japan have suffered, the simple fact is outside of Silicon Valley and the DC and NYC suburbs, much of America has suffered two lost decades as well, a symptom of a nation in decline.

Trump has refocused the debate around the plight of ordinary Americans, something conservatives have failed to do in recent years. Conservatism is an inherently populist ideology; we prefer giving power to everyday individuals than concentrate it in the hands of supposed experts. Conservatives have faith in the genius of every man and woman. Since 1988, that has been forgotten as the GOP became the Chamber of Commerce Party. Trump is rightly realigning the GOP around the working men and women of this country.

While Trump is imperfect, the general election is about who is the better candidate, making it a simple choice. Given his lack of a political record, there is some uncertainty about what he would do, but we can be certain of what Clinton will do. She will nominate liberals to the Supreme Court while he may nominate conservatives. Take even an area where Trump supposedly disagrees with orthodoxy: trade. Does anyone really believe the same government that has run VA hospitals so terribly negotiated perfect trade deals, particularly when we know China has amassed $3 trillion in reserves?

True, Trump lacks a foreign policy record and is something of a wildcard, but no record is better than a record littered with failure, from ISIS taking territory across the Middle East to China building militarized islands throughout the South China Sea. As Secretary of State, Hillary Clinton left a world on fire; no wonder global warming appears to be such a problem…

It is said every election, but in 2016, the stakes really could not be higher. Implicit in the Never Trump argument is the belief the damage of a Clinton Presidency is containable, which underappreciates the power of a party’s 3rd term in power. Controlling the White House for 12 years cements policies and structurally shifts the political center. The Roosevelt-Truman terms shifted the country left for two generations, making support for more entitlements and welfare the new political center as evidenced by Republicans eventual acceptance of Social Security. Similar, the three Reagan-Bush terms shifted the political center rightward for a generation on most economic issues with even Bill Clinton declaring the era of big government over.

Clinton will cement the leftward shift begun by Obama for a generation with Obamacare, political correctness, and new regulatory regimes across the economy becoming entrenched political facts, unlikely to be rolled back for years, if ever. For eight years, Obama has pushed our economy, society, and foreign policy footing into one that looks more like Europe. A Clinton Presidency makes a reversal from that path all but impossible. We see the results of Europe’s experiment, and they’re devastating: slow growth, high debt, chronic youth unemployment, and atrophying military power.

The race is tightening, and in the polling averages, Trump has taken the lead in Ohio and Iowa while other states like Florida, North Carolina, and Nevada are too close to call. With momentum at his back, now is the time for reluctant Republicans to get behind Trump. Whether Trump wins 85% or 90% of republican voters on November 8 could very well determine who wins the Presidency. Leaders like John Kasich must really ask themselves if they are willing to sow division and make it easier for Hillary Clinton to continue Obama’s disastrous policies as President.

Donald Trump is our last chance to turn back from the current path of decline and decay. Conservatives need to get behind the republican nominee or risk losing the country we all have fought so hard to build.

Time to Unite Behind Trump

While the media focuses exclusively on deepening divides within the Republican Party, we need to take a step back and remember the stakes of this election. A certain Senator this evening exhorted voters to “vote their conscience.” Yes, his non-endorsement of Donald Trump was clear, but let’s consider what our conscience actually demands of us.

Does your conscience consider the fact 3,400 Americans, many of them children, have been killed in the past 8 years in the city of Chicago acceptable? How about the fact the unemployment rate for African-American teenagers has risen in 2016 to 31%? Or that economic growth, the ultimate engine for lifting people out of poverty and into the middle class, is running at the slowest pace in a peace-time recovery since World War II? Are you comfortable with the fact that after years of decline, the violent crime rate has been rising since early 2015? Can your conscience tolerate the fact that Radical Islam is on the march, poisoning the minds of millions, seeping into Europe and even this country, while stripping millions of Muslim women and gays in the Middle East of basic human rights and dignity?

Are we willing to accept that this is the best that America can be? If your conscience says, “yes, the status quo is acceptable,” then perhaps you should vote for Hillary Clinton. After all, she is not an agent of change. Rather, she is beholden to an entrenched donor and political class that will continue the policies of President Barack Obama. Moreover, this status quo will persist beyond her 4 year term as she appoints judges, regulators, commissioners, and civil servants who could serve decades beyond her final day in office. A Hillary Clinton Presidency will cement our current trajectory for a generation. However, even if you are comfortable with the status quo, does your conscience permit you to vote for a woman of Hillary Clinton’s character? Obama’s own FBI Director noted Clinton’s “extreme carelessness” as she attempted to keep her emails secret from voters while exposing our nation’s secrets to our enemies. She even told the mother of an American killed in Benghazi that a video was the cause of the attack while telling her own daughter and a foreign diplomat otherwise. If Hillary Clinton can’t be trusted to tell a grieving mother the truth, can she be trusted in the event of a national crisis?

True to the American spirit of perpetually seeking national betterment, perhaps your conscience says the status quo isn’t good enough, that we can do better. That we can turn a safety net that merely makes poverty more palatable into a safety trampoline which makes poverty less prevalent. That we should give all parents choice where their children go to school to end the vicious circle of entrenched poverty. That we can accelerate growth by returning power and freedom to the most innovate citizenry the world has ever known. That we have a leader who is unafraid to call out evil in the world by its true name and work to eradicate it, instead of merely downplaying it.

Doing better requires doing something else. It requires voting not for an all-talk-no-action entrenched DC elite but for an outsider who is a doer not a talker. Doesn’t our conscience demand a vote for Donald Trump? We need a President who will cease to accept the decline into mediocrity that is our present course. Would we not rather have Paul Ryan as a governing partner with a Republican White House than as a leader of the opposition against yet another Democrat President who is simply presenting the same old ideas in new packaging?

If we believe conservative principles will make American lives better, we have a moral imperative to vote for the candidate most likely to institute them. Without a doubt, that candidate is Donald Trump, helped by his fantastic running mate, Mike Pence, and a partner in Congress in Speaker Ryan. I will vote my conscience, and it demands a vote for Donald Trump.

He offers change. She offer more of the same. He will return power to ordinary people and to the markets to free up the economy, boost working Americans, and improve social mobility. She will continue the same top-heavy policies that have seen weakened growth and ever-rising inequality. He will restore strength around the world after a President who has let American power recede by backing off red lines, downplaying Radical Islamic terror, and letting China expand in the South China Sea. Her foreign policy? Well, let’s put it this way: if global warming is such a major problem, perhaps the fact Secretary of State Hillary Clinton left a world on fire shares some of the blame.

Let’s unite and win in 2016.

Feckless Actions That Caused a Firestorm

Earlier today, President Obama unveiled a batch of executive branch actions with the purported intention of cutting gun violence. While too often castigating his opponents on the issue as either heartless or in the pocket of the gun lobby, on the whole, the President offered an impassioned, compelling argument for more action on the gun issue, capped off by Obama startlingly and powerfully shedding tears as he discussed the horrific Newtown murders. Unsurprisingly, many in the GOP were up in arms (a sample: Trump, Cruz, Ryan, Price), and depressingly, some commentators even suggested Obama’s tears were fake.

Many on the right have put themselves in the position of simultaneously arguing President Obama’s actions won’t do anything yet pose existential threats to our constitution and the 2nd Amendment (this seems to be the NRA’s argument), which is a difficult if not impossible case to make. Sadly, by so quickly rushing to politicize the issue, many Republicans have shed the high ground as Obama’s orders are toothless, intended to rev up a political base needing motivation ahead of an Election. Will they solve the problem? No. Are they legal though? Almost certainly.

Aside from some uncontroversial actions on mental health, the thrust of the executive actions are focused on what it means to be a gun dealer. The Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) is clarifying what it means to be a gun dealer, namely whether or not a gun-seller has to get a background check on the gun-buyer. Given Obama’s directive, the ATF has attempted to guide sellers whether they need to seek a license and thereby get background checks, and it’s a mess.

Obama is not to blame for why the rules are a mess. Congress is because it consistently writes vague laws, leaving it to the Executive Branch to fill in the details. By doing so, the Congress abdicates its legislative authority to the regulatory bodies under the President. Congress has no grounds to write intentionally vague laws and then complain over the interpretation. Here is the text of the law Obama is clarifying:

The term “dealer” means (A) any person engaged in the business of selling firearms at wholesale or retail, (B) any person engaged in the business of repairing firearms or of making or fitting special barrels, stocks, or trigger mechanisms to firearms, or (C) any person who is a pawnbroker. The term “licensed dealer” means any dealer who is licensed under the provisions of this chapter.

….The term “engaged in the business” means—

as applied to a dealer in firearms, as defined in section 921(a)(11)(A), a person who devotes time, attention, and labor to dealing in firearms as a regular course of trade or business with the principal objective of livelihood and profit through the repetitive purchase and resale of firearms, but such term shall not include a person who makes occasional sales, exchanges, or purchases of firearms for the enhancement of a personal collection or for a hobby, or who sells all or part of his personal collection of firearms

In plain English, if you occasionally sell a firearm, you do not need to get a license. This exception, created by Congress, is what is referred to as the “gun show loophole” as at gun shows some individuals may decide to sell a gun or trade with another collector to enhance a collection. However, those who make a business selling guns have to follow the same legal procedures whether selling in their store or at a show. There is no exception for all sales at gun shows—the gun show loophole is really a misnomer.

The law begs the question though: when does occasional cease to be occasional? When does having a hobby turn into a business? We would all probably agree that selling 1 gun per year counts as occasional but selling 3,000 would not. However, Congress has left a massive gray zone; they intentionally ducked the issue, avoiding controversy, and passed it off to the President. There is no numerical definition for occasional, and Obama does not attempt to set one. There is as plausible an argument to be made that 50 sales ceases to be occasional as 100 sales. Don’t be surprised if different Presidents enforce at different levels; Congress’s vagueness and cowardice has empowered the Executive to do just that.

Obama is essentially telling his ATF to be more stringent in its enforcement of occasional, which Congress has granted him the right to do. Obama is not threatening our Constitutional balance of power; rather, Congress has abdicated its constitutionally prescribed ones, signing them over to the President. This is not the act of an Imperial President but the result of an Impotent Legislature. If Congress does not feel the intent of their words are being enforced, they have the ability to pass a new law more clearly stating what “on occasion” means, thereby restricting the President’s discretion. Barring that, what Obama did was perfectly legal. It also isn’t dangerous to our Constitution; unless one wants to argue existing laws and their gray area unjustly infringe upon the Second Amendment, a tough sell both in the court of public opinion and in the court of law.

These actions barely move the needle and will have next to no impact on gun crime as so few gun sales will be impacted. Few mass murderers purchased guns in a sale that would have been regulated differently thanks to these changes. This is political theater with the President trying to show he is doing something to rev his base while implicitly acknowledging to do something more sweeping Democrats need to take congress, meaning those who want tighter gun control have to get out and vote. I think it is clear that Obama wants to fundamentally change our gun laws, but (unlike on immigration and soon perhaps GITMO), he recognized his limits and acted within them. It makes for good base politics but will have an imperceptible impact on gun violence.

Instead of attacking Obama for showmanship and impotence while acknowledging that in his heart he wants to see lower gun violence (and arguing he is just pushing the wrong proposals), some on the right reflexively and sadly attacked his motives, suggested he was destroying and 2nd amendment, and lamented the uselessness of his actions. Again, the second and third points seem incoherent when paired together. This is an example of Republicans politicizing the issue as much as the President to enthuse their own base ahead of an election.

Sadly, it increasingly seems like both sides lack the will for a substantive discourse on this (and other) issues, preferring to gin up their respective bases rather than making persuasive arguments and finding common ground. We keep yelling past each on guns, achieving nothing. Meanwhile, China lands planes on disputed islands in the South China Sea, Iran and Saudi Arabia inch closer to conflict, and North Korea may have conducted a nuclear test. No wonder people hate politics.

 

If you like what you read, follow me on Twitter too!

No, Trump Won’t Doom Conservatism

As the calendar prepares to turn, one fact has remained constant: Donald Trump is the clear leader in Republican Primary national polls. He is almost certainly trailing Ted Cruz in Iowa but maintains a large lead in New Hampshire where establishment candidates have fractured the vote and should he win there is poised for strong showings through the March 1 “SEC Primary.” While national polls have dubious predictive power, establishment types are increasingly antsy about Trump’s staying-power as they (correctly) believe he would struggle in a general election. Take George Will for instance who last week declared in a column entitled, “If Trump wins the nomination, prepare for the end of the conservative party”:

“It is possible Trump will not win any primary, and that by the middle of March our long national embarrassment will be over. But this avatar of unfettered government and executive authoritarianism has mesmerized a large portion of Republicans for six months. The larger portion should understand this:

One hundred and four years of history is in the balance. If Trump is the Republican nominee in 2016, there might not be a conservative party in 2020 either.”

Now, there are two issues with Will’s column. First, a Trump nomination would not be the end of a conservative party in America. Presidential campaigns lend themselves to hyperbole (“this is a mildly important election” doesn’t turn out the vote so well), and that is the case here. Given his poor standing with Hispanics and women voters, I agree Trump would likely lose and lose badly. The only path I see would be choosing someone like David Petreaus as his Vice-President (to calm voters antsy about making Trump Commander-in-Chief) and go for an Upper Midwest strategy. Against Hillary Clinton, one would have to put the odds of a Trump victory at less than 15%, barring some dramatic economic collapse or terrorist attack that destroys President Obama’s popular standing.

Even if Trump lost though, the GOP is not doomed. Surely, many prognosticators saw disaster for liberals after Michael Dukakis suffered the third straight Democratic ignominy in 1988. In the three elections from 1980-1988, the GOP carried the electoral vote a combined 1440-174. That is called being lost in the wilderness, yet Democrats have proceeded to win 5 of the next 6 popular votes, and in 2008, America elected the most liberal man to be President since at least Lyndon Johnson in 1964 (Ideologically, Obama is probably to the left of Johnson, he is merely less effective at making his agenda law). My point here is that political persuasions are “stickier” or more entrenched than we sometimes give them credit for, and to suggest the GOP is one defeat from obsolescence is over the top, particularly with Republicans controlling the House and 31 Governor’s Mansions from which conservative reform agendas are being carried out. Would a third term for the Democratic Party have significant long-term consequences? Yes. Is the conservative party a terrible candidate away from disappearing? No.

Second, there is this sense that Trump is a cancer on conservatism when in reality Trump is exploiting a cancer that has already grown on the movement. Will is right to call out Trump’s constant boasting as a sign of a lack of self-esteem (this is an ironic charge from a man whose columns read like a self-conscious showcase of as many inane, multisyllabic words as possible in an effort to prove his intellectual superiority), and I too am no Trump fan, taking serious issue with his rhetoric, past policy flip-flops, Muslim travel suspension, and so forth. Trump is no typical conservative by any stretch, but his popularity in conservative precincts is easy to understand.

The intellectual, donor, and corporate establishment has grown increasingly adrift from the base with a rising elitism poisoning the conservative movement. Elements of the party have morphed from capitalist to corporatists with large, entrenched firms enjoying a convoluted tax code that serves to raise the barriers to entry. As explained in a bit more depth below (and in much more detail here) economic policy coming from the party seems to either reflexively reflect 1980s policies or benefit the monied interests. I’ve always struggled as to how a conservative can be an elitist given that the ideology is one optimistic about the skills of ordinary people. We have so much faith in man, we prefer to endow each individual with power rather than leaving it the hands of centralized bureaucrats who deem themselves experts. Conservativism is inherently populist, but often one can feel conservative DC elites looking down at Trump supporters and the citizenry at large.

Justifiably or not, the Republicans are viewed as the party of the elites, and that is problematic. Just examine the 2012 exit polls:

Romney lost 35%-63% among voters earning under $30,000 and 42%-57% among voters earning $30,000-$49,999. Romney lost the overall popular voter 47.2% to 51.1%, but if he had done 5% better among those earning under 50k (going from 38% to 43%), the popular vote would have been 49.2% for Romney to 49.1% for Obama. Obama still would have likely have won the Electoral College (Romney getting 253 instead of 206 votes, short of the 270 needed to win), but it would have been closer. For all of the talk about doing better with Hispanic voters to win elections, doing better with the working and middle class is critical for the Republican Party to win national elections (admittedly, doing better with the working and middle class likely entails doing better with Hispanic voters).

53% of voters thought Romney policies favored the rich; only 34% thought the middle class was favored. 21% of voters believed the most important quality was having a President who “cares about people like me.” Romney lost those voters 18% to 81%, and this block of voters was decisive in delivering the election for the President. Republicans have a clear empathy problem. Now, there are two possibilities here. One, the republicans offer the right policies for these voters and are doing a terrible job communicating them, or two, the policy mix is bad for these voters and they are acting rationally by voting for Democrats. As the Democrats are keen to offer free stuff, winning the communications battle will invariably be tough, but there is definitely room for improvement, especially as conservative policies can help lift working people more than an entangling, 20th century safety net. Plus, republicans don’t have to win these voters outright, just do less badly.

There are strains in the Republican Party that are offering wise policies, focused on improving and expanding the earned income tax credit, eliminating marriage disincentives, and successfully employing charters schools as Washington DC has done. Leaders like Paul Ryan, Mike Lee, and Marco Rubio have each come up with some good proposals in these areas, but Republicans have failed to come out with a comprehensive economic policy that all Americans, poor, middle class, and wealthy, can buy into in part because few in the party seem to recognize that the past 15 years, under both Presidents Bush and Obama, have been lousy for the middle and working class. President Bush’s economic record is far from perfect. This country has lost 5 million manufacturing jobs in 20 years and seen real median income declines since 1997:

Under President Reagan, America saw stellar economic growth, but his policies addressed specific problems, including a lack of capital and squeezed margins. His tax cuts were aimed at fixing specific problems and are not a timeless solution in and of themselves. Today’s problems are different with a job-skills mismatch, burdensome lending regulations, inefficient deductions, and internationally obsolete code, and the solutions need to address these ills while recognizing policies must help the working and middle class lift themselves up (different from the Bernie Sanders approach of tearing the rich down). Has any somewhat viable Republican Presidential candidate made an argument they will help workers?

Trump has. The premise of his campaign is helping workers. He has said Super PACs screw Americans because politicians become beholden to corporate donors. Our free trade agreements have cost us jobs because our leaders are terrible negotiators (and if you were one of the 5 million who lost a manufacturing job, you would have some sympathy for this argument). Over the summer, Trump said, “the middle class is getting clobbered in this country. You know the middle class built this country, not the hedge fund guys, but I know people in hedge funds that pay almost nothing and it’s ridiculous, OK?” It is unsurprising that Trump has built a strong base of support amongst working and middle class voters in GOP primary polls because his campaign is directly targeted to them.

Now, this is separate from arguing Trump policies would actually help the middle class (this is very debatable), but he, being a master brander, has done an excellent job selling it. It has been easy for him because the establishment has shown no interest in reaching out to these voters in years. Did Romney ever prosecute the case as to how ordinary Americans would be better off? Exit polls (and memories of the campaign) say “no;” the establishment has no built in credibility. We’ve gone from Reagan calling all Americans “heroes” to Romney decrying “the 47%” behind closed doors. Plus, no other candidate has made a compelling argument to these voters. Ben Carson has an inspiring life story but has been unable to offer a specific policy vision on economic or foreign affairs. Jeb Bush is just constitutionally incapable of making compelling arguments, and while he has promised 4% growth, he has never articulated how his plans ensure the growth will be enjoyed by all. Rubio hits some of the right notes, like an expanded-EITC, but has focused on foreign affairs (he is best positioned to appeal to working people in my opinion but has failed to make a clear effort). Ted Cruz’s tax plan would likely hurt workers and creates a VAT that disincentivizes employment—it’s an unimaginably idiotic tax plan to be frank.

Trump’s competitors have made it easy, proving utterly incapable or uninterested in offering an inclusive economic message. Given 15 years of stagnation and a republican establishment that has made little substantive effort to include them, working and middle class voters are understandably frustrated and willing to go for an unorthodox candidate. Enter Trump who has a message tailored for them and who has faced no competition on the economic populist front. No wonder he polls so high.

Trump isn’t a doctrinaire conservative, but conservatives have failed to update policies or explain how our vision economic plans can help all Americans. That is the movement’s failing. Blaming Trump voters for being unprincipled for backing a (charitably) inconsistent conservative has proven pointless in bringing down his support and is perhaps unfair to his supporters. If you offer voters nothing, don’t be surprised if they look elsewhere and ignore your warnings. Voters are perhaps willing to look past Trump’s faults because they see no alternative—what has the conservative movement done for a steelworker the past decade?

By failing to build a conservative economic plan that can work for all Americans and then failing to sell our vision in a clear and convincing fashion in all corners of the country from Wall Street to 125th Street, we have left the field wide open for Trump. Within reason, conservatism and populism are not at odds, for what good is a policy that does not benefit most of the populace? Who is better positioned to argue that their policies will help people than the party promising to return power to the people? If there is no conservative party in 2020 or 2024, it won’t be because of Trump. It will be because Republicans have failed miserably in being the Opportunity Party.

A Conservative Argument for the Estate Tax

On this “Giving Tuesday,” Mark Zuckerberg announced in a public letter to his just-born daughter that he and his wife would be donating 99% of their Facebook stock. The gift is aimed at advancing “human potential and promote equality for all children in the next generation.” This gift is a massive commitment of $45 billion (at Facebook’s current share price) that has the potential to truly better the world. Don’t feel too badly for their daughter, Max, who is still in-line to get about $450 million (at today’s market price), or about 2x Mitt Romney’s net worth.

In light of Zuckerberg’s action, it seemed pertinent to briefly discuss the estate tax, and why I actually think conservatives should support it (despite deftly dubbing it the “death tax”) as I have alluded to in the past. My view is admittedly out of the orthodoxy and runs counter to our slate of Republican Presidential contenders who want to eliminate the tax.

Briefly before delving into my argument, I would emphasize my support for an estate tax in principle and not for our idiotically concocted one. Under current law, all estates beyond $5.4 million pay the same marginal tax rate of 40%. A small business owner with $30 million faces the same marginal rate as Warren Buffett, which is absurd. A primary concern of mine (and all conservatives…hopefully) is the ability of the super-wealthy to maintain their status for generations, which cannot be done at $30 million but can be at $30 billion. That small business owner or farmer also likely has less liquid wealth, and heirs could be forced to sell to pay the taxman, which argues for a lower initial rate. For illustrative purposes, I would propose a progressive estate tax of perhaps 15% for $5-15 million, 25% for $15-25 million, 35% for $25-$50 million, 50% for $50-$250 million, and 70% for $250 million and higher. I would also allow one’s tax burden to be nullified by charitable donations. That would mean the Zuckerberg estate would face no estate tax liability as it is donating over 70% to charity.

 

  1. Tax Code Efficiency

As some government spending is required and 100% debt funding is unsustainable, we have to tax. The conversation turns to how much we have to tax (dependent on how much we spend) and how we structure our tax code to generate the requisite revenue. Some liberals have this fixation on a “fair” tax code with no discernible definition of fairness. Conservatives focus on an efficient tax code, which is to say the code that has the least retardant impact on growth. Such a tax code would allow the economy to perform the best, all else equal, and help the poor and middle class improve their standing and their standard of living.

This requires taxing the least productive segments the most and most productive the least. Plus as we need to generate a certain amount of revenue, the decision to tax one party is in a sense a decision to not tax another (dynamic scoring adjusted). The estate tax generates about $20 billion in revenue per year or less than 1% of total federal revenue, so it isn’t particularly big (though I would put forth that $20 billion is still a lot of money, call me old-fashioned). If we want to generate the same aggregate revenue, we would have to increase other taxes by that $20 billion. One could argue income and corporate taxes are on today’s productivity whereas an estate tax is on the accumulated productivity of the past. Which tax would appear to drag on economic growth more?

From a different perspective, the estate tax in a sense takes money away from the ensuing generations (the heirs), and as I explain in point 2, it is very uncertain they will use the funds in a productive fashion whereas income is more clearly associated with productivity. Whom would you rather tax if you want a tax code that is likely to impact productivity the least? While there are individual exceptions no doubt, in aggregate, the estate tax targets less productive capital (from either vantage point), meaning we can tax more productive capital and labor less (to the tune of about $20 billion/year), which at the margins should support growth. (In full disclosure, I would note the Tax Foundation seems to disagree with me, though I would suggest it overstates the productivity of the estate capital taxed).

I would also note that I actually hope my estate tax generates no revenue because individuals choose to donate to charity in lieu of paying a tax to the government as my concept would allow. On the whole, charities can be far more productive users of capital than government bureaucracy. While this would lead to lower revenue, it would alleviate the welfare burden on our government, allowing spending to fall (in all likelihood more than the tax revenue shortfall).

2. Capitalism Requires Meritocracy and Efficient Use of Capital

For a capitalist society to work efficiently, individuals and organizations need to benefit based on merits. The most talented should do better and accumulate wealth because they are superior allocators of capital. It is a good thing Warren Buffett has $75 billion and your Uncle Billy doesn’t because Buffett is more adept at making wise investments and is more likely to pursue projects that generate value. Individuals should rise and fall based in large part on their ability and willingness to work hard.

Large estates are large because someone had a talent and was able to generate value. A just and efficient society is glad and benefits from their accumulation of wealth. However, there is no guarantee their children are equally talented/hard-working. Without an estate tax, those funds can be passed down to a generation that wastes the funds (the Paris Hilton’s of the world if you will). Now, some inheritors do tremendous things with the inheritance, but just as many (more I would argue) do not. In aggregate, society does best when capital is tied with those who are the best allocators of it not those with the best last name.

The American Dream is founded on the idea anyone with enough hard work can rise in society. An aristocracy enjoying the fruits of past generations’ labor can stifle advancement and lead to economic malaise, undermining the advancement of others. That isn’t a capitalist or conservative society. It is a corporatist society benefitting entrenched, status quo players. If we really thought passing down things blindly was so great, why did we ever revolt against monarchial rule? The American experiment is directly juxtaposed to aristocracy, which can arise without an estate tax.

Now, this is not to suggest passing down money is bad. It is wonderful to give one’s children the ability to do anything (problems arise when they have so much they can afford to do nothing). The ability to provide a better life for one’s children, even after one’s passing, can be a key motivator that increases productivity. The danger doesn’t lie in someone passing down $5 million, which can easily be wasted in a generation (or shorter), the danger is in the $5 billion passed down that can let numerous generations ride on the coattails of success. That is why a progressive estate tax is far more rational as it more directly deals with the meritocracy issue without punishing parents for wanting to give their kids and grandkids more opportunity.

Inherited wealth on a large scale can breed laziness and an under-productive over-class in an extreme. For families to rise, some inevitably must fall. An estate tax actually helps to engender meritocracy and thereby enhance growth over time.

3. The wealthy are already disbursing their estates to society

Since launching several years ago, Bill Gates and Warren Buffett’s The Giving Pledge has been a stunning success, getting 138 billionaires to pledge half their wealth (or more) to charity. Again, these participants, under my conception of an estate tax, would essentially face no estate tax liability, since I would fully credit any charitable contributions against the theoretical tax liability. It is telling that so many of the most fortunate choose to give away the vast majority of their wealth. They are beneficiaries of my second point (meritocracy) and understand the importance of preserving that structure, rather than letting future generations fritter away their hard earned wealth. Of course beyond the pledge, countless wealthy individuals are exceptionally generous as well.

Now admittedly, not everyone is a member of the pledge, and some would probably prefer to pass on everything. However, there is some wisdom to the crowd—that is a basic tenet of market economics. For instance, stock prices are fairly efficient and good (probably the best) barometers of fair value because a wide crowd, everyone in capital markets, is buying and selling to the crowd-determined appropriate price. History has proven it hard to beat. Perhaps, the actions of the world’s richest signals the proper policy? While I wouldn’t blindly follow the crowd, it does merit some thought. Moreover, given how much wealth is being donated anyway, the estate tax, if done right, will actually be used in very few instances.

4. It really isn’t double taxation

A common refrain conservatives use against the estate tax is that it is double taxation (taxing already taxed income). That is a bit simplistic, and I would note much of our tax structure, including sales tax, some income taxes, some capital gains taxes etc. are double-taxes. If possible, eliminating all forms of double-taxation would require increased taxation on primary forms of income (unless you are willing to shed hundreds of billion in revenue per year). It isn’t clear that is a preferable system.

Now some estates are as classically argued “double taxed,” but most of the largest estates are not. Most large estates come from entrepreneurs and business founders whose wealth is the equity in their business. This wealth is not taxed prior to death. To illustrate, let’s take the case of Mark Zuckerberg and assume he died Monday before deciding to donate money. He has $45 billion in Facebook stock, but this wealth has never been taxed because it is paper wealth. We tax income (which his Facebook holdings are not) and realized capital gains, and since he is still holding FB shares, the gains are unrealized. When he dies (in the hypothetical), he has actually never been taxed on his wealth. The estate tax would be his first tax not a double tax. Most large estates are similar; much of the estate tax revenue is primary not double taxation.

Plus under current law, the cost-basis of an estate is “stepped-up,” meaning that $45 billion capital gain disappears as his heir marks up the cost-basis to the market price at death. If you eliminate the estate tax without eliminating the step-up feature, his wealth is never once taxed as it passes generation by generation. Meanwhile, workers and W-2 earners (almost all Americans) pay taxes every paycheck. That does not strike me as an efficient structure. Now, we want to incentivize entrepreneurship as they create jobs but no taxation is a bit much. Plus, our current system, in which taxes are deferred until gains are realized, is already an incentive as it lowers the present value of an entrepreneur’s tax bill relative to an employee.

Even if double taxation is inherently bad, which is far from clear and would require a far more drastic overhaul likely resulting in a large consumption tax (which has many negative side-effects), much of the estate tax revenue, particularly from the largest estates, is not a double tax but actually a primary tax. The true picture is a bit more complicated than the political talking points suggest (how unusual!).

5. The confiscation argument against the estate tax doesn’t hold

One constant argument against the estate tax is that it is the confiscation of hard earned wealth, which the government should not be in the business of doing. We could use that rationale for any tax however. The income tax also confiscates the earnings of individuals. Taxation is inherently coercive (optional taxes tend not to generate much revenue), so unless one is willing to argue against all taxes, it is hard to justifiably singling out the estate tax. In any functioning society, there has to be some taxation to pay for public goods. Someone worth $10 billion can still pass down over $3 billion after taxes/charity, which is still a tremendous sum despite my highly progressive proposal. Every tax is by its nature confiscatory and coercive. It is inconsistent to use this argument, often put forth by conservatives sadly, to oppose an estate tax while supporting other taxes.

 

Recognizing this can be an emotional issue for some, hopefully, these arguments at least give pause for further reflection. People of good will and of different political persuasions can disagree on this issue as I don’t see the estate tax as a clear conservative/liberal issue despite how our political parties use it. Ultimately, conservatism is best served when we push for comprehensive tax reform that, yes, includes a reformed estate tax. A conservative-oriented, merit-based society that has an efficient tax code actually necessitates an estate tax, and the two most frequent criticisms of the taxes are a bit lacking.

Death to the death tax is neither conservative nor wise policy.

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.