Fiscal conservatives should start panicking right…about…now.
Last Thursday’s Republican primary debate in Houston may have been entertaining for socialists with a serious case of schadenfreude, but it was a total nightmare for moderate and fiscal conservatives hoping that cooler heads would have prevailed by now.
Normally, on the day before the all-important Super Tuesday primary blast, the GOP election machine would have successfully marginalized the outsiders, fresh-faced kids, troublemakers, and irrelevant candidates from the field of likely Republican nominees. You know, the Steve Forbes, Dan Quayles, David Dukes and Lindsey Grahams of the race.
One, possibly two, candidates would stand out from four or five left, giving the illusion that the GOP was actually letting the people choose their party’s nominee. In the end, the level-headed fiscal conservative voter would make the rational choice, choosing a candidate who they believed could not only bring out the base, but also appeal to enough centrists, moderates, and conservative Democrats to win the general election in November.
Based on this formula, of the five remaining candidates on the GOP ballot tomorrow, Ohio Governor John Kasich should be at the top of the list. He is by far the most level-headed of the bunch and is the only candidate with any relevant executive experience. He is also the only candidate left with a record of balancing budgets and practicing, not just preaching, the basic tenets of fiscal conservativism by turning deficits into surpluses while keeping taxes low. He struck deals with Democrats to balance the budget and fought corrupt Republicans addicted to pork—and he did it with class.
But while Kasich is the only GOP candidate left who consistently trounces both Hillary Clinton and Bernie Sanders in head-to-head polls, he isn’t expected to do well on Super Tuesday. Indeed, the avuncular Midwesterner is probably going to do terribly, finishing well behind billionaire (outsider) Donald Trump in every state. Kasich also trails Florida Senator Marco Rubio (the fresh-faced kid) in some states and Texas Senator Ted Cruz (the troublemaker) in others. Indeed, he may even finish below the (irrelevant) soporific surgeon, Ben Carson, putting him dead last in some states.
How could this be? Why would Republican primary voters reject a true fiscal conservative and vote for a bunch of inexperienced troublemakers, none of whom have presented a viable plan to kick the debt, grow the economy or fix healthcare? The leading candidates have instead promised a chicken in every pot, a blank check for the military, a wall on the nation’s southern border, mass deportations of millions of (employed) illegal aliens, all while reversing everything done by the “wicked” President Obama.
To be fair, it’s not unusual for politicians to overpromise while campaigning. Nevertheless, the Republican candidates this cycle have all presented tax and budget plans that go way beyond the typical election cycle fib—they are either totally irresponsible or totally incoherent.
Ted Cruz, for example, says he wants to get rid of the 35% US corporate tax rate and replace it with a 16% “business flat tax.” At first blush it looks like corporations would see their tax bills cut in half. But the net effective tax rate for US corporations (what they really pay after loopholes and deductions) is somewhere in the neighborhood of 12%-13%, not 35%, according to the Government Accountability Office (GAO). So for many corporations, a 16% tax would cause their tax bill to go up, not down.
It gets worse: The new tax wouldn’t be levied on a company’s net profits as is the case today; rather, it would be levied on a company’s gross profits, which is its total sales minus all the payments made to other businesses as well as all capital expenses. All other general business expenses, like utilities, advertising costs, insurance, and, most importantly, employee wages and benefits, would be subject to taxation by the government. Since labor would now be essentially taxable, the government would be pushing companies to hire fewer people. And those employees who managed to avoid the firing squad would see their benefits slashed.
But probably the biggest issue is that the plan simply doesn’t add up. Along with eliminating the business tax, it also eliminates payroll and estate taxes, while cutting the national income tax to a flat 10% for everybody. Since rich people pay the bulk of taxes, this would erase a huge amount of revenue, which wouldn’t be replaced by the “business flat tax.” The Tax Foundation, a right-leaning think tank, estimates federal revenue would fall by $17.3 trillion over the next decade. Even with the rosiest of assumptions regarding economic growth, the Cruz plan still ends up in the red. That means further budget deficits and an increase in the national debt.
Marco Rubio’s plan doesn’t add up either, although it is a much better deal for the indigent. Those in the bottom 10% of earners would see their after-tax incomes shoot up thanks to a bevy of targeted tax credits, especially to those with children. So not only would they pay no tax, the government would also be cutting them a check. This would be an increase in spending to the tune of around $1.7 trillion over the next 10 years.
The bulk of the tax burden would then fall on the middle class, while the rich would actually receive a modest tax cut to 35%. But the rich make their money from inheritance and investments, which Mr. Rubio would make tax free by eliminating the estate and capital gains taxes. While this would be great for high earners and rich families, it would also deliver a huge blow to the nation’s finances, which if weren’t met with spending cuts would sink the country further into the red. But Mr. Rubio isn’t really good at cutting. Indeed, he wants to increase military spending back by around $1 trillion over the next 10 years. To pay for that, he would have to introduce draconian cuts that could negate any of the benefits coming from the tax credits.
Lastly we have Donald Trump. His tax plan is probably the worst of all worlds, a mishmash of liberal and conservative ideas that would push the country into an abyss of red ink. His plan collapses the current seven tax brackets into three of 10%, 20%, and 25% and raises the standard deduction significantly, exempting individuals making less than $25,000 from paying any tax at all. Deductions would be limited, but the big one, the mortgage interest deduction, would be preserved. Corporate taxes would be slashed (or effectively increased) to 15%, depending on the company’s net effective tax rate. Meanwhile, he would keep the capital gains tax rate at 20%, while taxing carried interest at normal tax rates instead of at the lower capital gains tax rate. The change in carried interest would cause Wall Street, especially private equity, to go apoplectic.
Despite this increase in revenue, the overall trajectory is still negative under the Trump plan. The Tax Policy Center estimates that if Trump failed to make draconian spending cuts, his plan would add $11.2 trillion to the national debt by 2026 and $34.1 trillion by 2036. Since he has promised to increase spending for the military and not cut Medicare or Social Security (or default on the nation’s debt), he would need to decrease discretionary spending by about 82%.
Yeah, that’s probably not going to happen.
Governor Kasich is also promising to lower tax rates, but he has proven that he can make the cuts necessary to pay for them. He made a lot of tough decisions as head of the House Budget committee in the 1990s. This is the guy who found the $10,000 hammers and $4,000 toilet seats in the defense budget and called the DOD out on it. At the same time, he worked with Democrats to reform entitlement spending. It is tough to see how any of his fellow candidates will be able to work with their fellow Republicans, let alone Democrats, to get anything done.
But with Kasich languishing in the polls, Super Tuesday will be a painful day for fiscal conservatives. Cruz, Rubio, and Trump have all presented fiscal plans that promise big tax cuts but which fail to balance the budget or pay down the national debt. We have learned over the last 30 years that financing tax cuts with debt is not an effective way to stimulate growth. It is only when those tax cuts come with major spending cuts that they can lead to an increase in growth and thus a balanced budget.