March 21, 2021

by Steve Stofka

At a Senate Banking Committee hearing this week Senator Tim Kane presented a comparison of two philosophies of governing. Without any Democratic support, Republicans passed the Tax Cut and Jobs Act (TCJA) in December 2017. Prior to its passing, the non-partisan Congressional Budget Office estimated the loss of revenues at $1.5T over ten years. After two years of data, they revised their estimate of lost revenue to about $1.8T. The bulk of the benefits go to the top 20% of incomes. Without any Republican support, Democrats passed the American Rescue Plan (ARP) two weeks ago. Its estimated cost is $1.9T over ten years. This bill will benefit the bottom 60% of income earners. Two plans, two philosophies, similar costs.

Tim Kane suggested that we are having a real-world experiment. Both laws are projected to cost the same amount. Economists already have performance metrics on the Republican law from 2018-2019, the two years before Covid.  In 2023, economists can compare performance and benefits of ARP which exemplifies the Democratic philosophy.

The essence of the Republican philosophy is an assumption that income and benefits will “trickle down” from the top 20% of income earners, the wealthy in America. After three decades of Republican rhetoric that income should trickle down, many economists find the opposite trend. Those at the top get wealthier.

The Gini coefficient is a measure on equality/inequality. 0 represents perfect equality, 1 represents perfect inequality. In 1972, the Gini coefficient for household income in the U.S. was .4. In the fifty years since, that coefficient has risen to .48 (FRED Series GINIALLRH), near the mid-point of the equality/inequality range. An economic analysis can only confirm what many Americans sense intuitively; life is getting easier for the wealthy and harder for the middle and working classes.

The Republican philosophy espouses tax cuts and a strong defensive posture around the world which has led to a constant state of war. Former President Trump had to fight his own party to cut back troop commitments in Iraq and Syria. These twin goals – a larger military and tax cuts – are incompatible and have caused bigger deficits than Democratic administrations over the past forty years. Republican voters care about deficits so Republican politicians continue to pay homage to the idea despite their poor performance on that count. Republican politicians counter that it is the Democratic benefit plans that cause deficits, not Republican military spending and tax cuts.

Democrats champion more benefits and higher taxes on high income earners to pay for the benefits. Most of those high-income earners are in solidly Democratic states, not Republican political strongholds, so there is little advantage to Republican resistance to higher taxes. Republicans are opposed to higher taxes on principle, not politics. They believe that there are few legitimate functions of central government under Federalism: 1) provide a common defense and make treaties, what John Locke called a Federative power in his Second Treatise of Government, 2) resolve disputes between states, 3) preserve property and individual freedoms. The several other functions like coining money and post offices can be found in Article 1, Section 8 of the Constitution.

The heart of the dispute between Republican and Democratic voters lies in their different interpretations of the General Welfare clause of that section, i.e., that Congress shall have the power to “provide for the common Defence and general Welfare of the United States.” Democratic voters believe that phrase means Congress should provide for the welfare of the people in each state. Republican voters believe that it applies at the state level. In interpreting the Second Amendment, Democrats and Republicans switch; Democrats think gun rights apply to state militias while Republicans think those rights apply to individuals.

These are long standing arguments and opinions that resist change, despite the experimental data. I agree with Tim Kane that we have a chance to compare economic philosophies. I disagree that the results will change many minds. We don’t like to change our habits or opinions.

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Photo by Bermix Studio on Unsplash