Where Are Those New Ideas?

At the end of June, I published a post in which I marveled at Newt Gingrich's reputation as a guy with a lot of ideas, even though there is precious little evidence that he has ever had an innovative idea in his life. Once a media narrative is put in motion, however, it is nearly impossible to dislodge it. We can, therefore, count on being treated to regular reminders of what a smart guy he is, even though he seems to spend most of his time on TV talking about "death panels" and peddling other outright lies and distortions.

Possible evidence to the contrary did, however, show up on the TaxProf blog recently. It seems that Gingrich's new lobbying organization (which has one of those generic names beloved on both sides of the aisle in Washington, combining -- seemingly at random -- words like "future" and "solutions" and "American," but somehow skipping over "freedom" and "liberty" and "progress") has started a petition drive in support of a plan to fight the recession and create jobs, jobs, jobs. Truly a worthy goal. The innovative, breakthrough tax planks of the plan are:

(1) Cut the payroll tax in half for two years,
(2) Abolish the capital gains tax permanently,
(3) Reduce the corporate tax rate, and
(4) Abolish the estate tax. (Not that they used the term "estate tax," of course.)

A few things immediately leap from the screen. First, there is absolutely nothing new in #2-#4. It is always about tax cuts, and it is always about cutting or eliminating these particular taxes. We have even been told that the only proper response to the terrorist attacks of 9/11/2001 was to cut the capital gains tax. (For my critique of that bit of opportunism, see here.)

Second, the only thing that seems to vary is whether we are being told that we must reduce or completely abolish capital gains and corporate income taxes, while the estate tax must always be eliminated entirely. Why the difference? We are never told, and even within the economics literature that attempts to measure the supposed damage to the economy of these taxes, there is precious little support for the idea that the estate tax is the worst of all the taxes on capital.

Of course, the heavily-financed public relations campaign against the estate tax has been so successful that, as a political matter, the base (who, one might expect, would be the target of such a petition/fundraiser) is most revved up about eliminating that tax in paricular. What's the matter with Kansas?

Third, the only mildly unusual (but hardly new) proposal is #1, which at least appears to be a cut in taxes on labor rather than capital. Of course, after describing this tax proposal as a "take home pay raise" for all workers -- yet inexplicably and arbitrarily limiting the cut in this tax to two years, rather than a permanent reduction or outright repeal -- Gingrich's group then describes the proposal as a business tax cut: "This would also immediately increase the liquidity of every small business, because there would be more money available to put back into the business and create more jobs."

It is especially interesting that this argument is coming from the people who also tell us that the tax rate that workers pay includes the the employer's half of the Social Security and Medicare taxes. (This is part of, for example, those high combined rates of taxation that we sometimes see trumpeted in the news, claiming that people are forced to pay rates of more than 50% on their additional earnings.) If businesses would use the reduced payroll taxes for something other than increasing the take-home pay of workers, that exposes as a fraud the idea that workers really pay the full amount of payroll taxes.

Moreover, if workers will not receive the full amount of the cut in payroll taxes on the business side, why should we expect that they will receive all -- or any -- of the cut in the workers' half of payroll taxes? This is, of course, just an application of the age-old question of "tax incidence." If I am an employer, and I know that my workers are currently willing to work for me at a take-home salary of, say, $30,000/year, why would I let them keep the cut in their half of the payroll tax? I can cut their gross salary and leave them no worse off than before. In an economy with no bargaining power for workers (lack of jobs, jobs, jobs), how could workers complain?

Still, this proposal might be acceptable (though dishonest marketing) if the businesses were to use the money that they keep from the tax cuts actually to create jobs. Unfortunately, the problem in today's economy is not the supply side. Businesses are failing to create jobs because they cannot sell the products that those new workers might produce. Stimulus spending that would generate demand and thus make it worthwhile to hire workers is, of course, not part of the plan.

In fact, and as a fourth and final point, the plan would directly undercut the stimulus by redirecting unspent stimulus money (and remaining TARP funds) to replace the money that the payroll tax cuts would otherwise drain from the Social Security and Medicare trust funds. Essentially, therefore, the payroll aspect of the tax plan is just a way to tilt the balance ex post between tax cuts and spending in the anti-recessionary policies that have already been adopted.

It is possible, one might suppose, to count as an "idea" a proposal to undermine despised policies by simply repackaging familiar anti-tax rhetoric. If this is the basis for a reputation as an idea man, however, the term is even more degraded and empty than we might have suspected.

-- Posted by Neil H. Buchanan