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Have Republicans Lost Their Way on Taxes?

The Atlantic’s Marc Ambinder has the details on the Republican Party’s alternative to the stimulus package, which comes in the form of a big, heaping pile of tax cuts:

They’d cut marginal income tax rates across the board by five percent, increase the child tax credit to $5000, make the 15% capital gains and dividends tax rate permanent, repeal the AMT on individuals, repeal the law requiring mandatory withdrawals from IRAs and 401Ks for seniors; make all IRA and 401(k) withdrawals penalty free during 2009. (Obama agrees with this last idea.)

For businesses and entrepreneurs, they’d allow businesses to either fully deduct the cost of their new assets from their tax returns; they’d cut the top corporate tax rate bracket by ten percentage points; end the capital gains tax on inflation; extend the “carryback” period for operating losses to seven years. (Obama wants this extended back five years.)

Never mind the wisdom of the policy implications behind these tax cuts — let’s talk merely about the politics. These tax proposals are along the same lines of those proposed by the McCain campaign during the election season, although at a much larger volume. There are a few elements that might appeal to the middle class — for instance, the increase in the child-tax credit and certainly the across-the-board reduction in baseline income tax rates. But otherwise we have a series of policies like the capital gains rate freeze and the AMT removal that are going to be of more immediate and obvious benefit to higher-income Americans and to businesses. Basically, it’s the Heritage Foundation’s Blue Plate Special.

Imagine that you’re a wealthy American trying to reduce your tax burden. You have one significant advantages in trying to affect policy: There is a fairly deeply ingrained distaste for taxation in American culture. Also, most people think they personally pay too much in taxes. On the other hand, you have one significant disadvantage: most people think “the rich” — however they define that — pay too little in taxes. Moreover, this is a democracy, and there aren’t very many rich people whereas there are a lot of poorer and middle-class people. The history of American tax policy is essentially a continual tug-of-war between these two realities.

In order to win the tug-of-war, you have a lot of potential strategies, but the basic one is to persuade the middle class that they’re in the same boat with you. Sometimes, you can find a clever way to do this by claiming that cutting your taxes will actually help them because your money will stimulate growth (e.g. trickle down theory). Alternatively, you can hire Frank Luntz and try and manipulate the public debate such that the middle class thinks a tax cut might affect them when it is unlikely to do so; the estate tax, for instance, affects only persons who estates have accumulated into the millions, but by calling it the “death tax”, you make it seem as though it is as universal as death itself.

The other strategy, of course, is buying out the middle class by cutting their taxes at the same time that you cut yours. Reagan’s tax cut in 1981, for instance, proposed a 30 percent across-the-board reduction in marginal tax rates (the Congress pared the cut down to 25 percent), something which seems eminently fair. The “trick” is that some of the revenue shortfall was made up for by increases in the payroll tax as well as corporate tax rates, each of which are more regressive than income taxes.

Now, I’ve been engaging in a little bit of sleight-of-hand here. Is the strategy of a “wealthy American trying to reduce [his] tax burden” necessarily the same as the strategy of the Republican Party on fiscal policy? I would argue that, since 1981, it essentially has been. But this is certainly not what the Republicans want you to think — they want you to think they’re out for Joe the Plumber, not Joe Millionaire. In recent years, however, I think the Republicans have become less effective at marketing their tax policy as such. John McCain, for example, was thoroughly outmaneuvered by Barack Obama during the campaign, with the latter’s promise for tax reductions on “95 percent” of Americans.

Likewise, I think the Republican “alternative” on the stimulus is not likely to be terribly appealing to middle-class voters. If the Republicans were more serious about their philosophical commitment against taxation, why not instead propose a either a long-lived holiday or a permanent reduction in the FICA (payroll) tax as the entirety of their stimulus package? This has the benefit of being much simpler than their hodgepodge of tax cuts. It also has the benefit of being associated with a much higher multiplier during a recession than other types of tax cuts.

But, because the payroll tax is capped at about $100,000 in income, suspending or reducing it would not be all that helpful to wealthy Americans, to whom it represents only a tiny fraction of their tax burden. Thus, just as the Republicans can accuse the Democrats of using their stimulus plan as an excuse way to increase the size of government, the Democrats can accuse the Republicans of using their alternative as an excuse to help the rich.

Nate Silver is the founder and editor in chief of FiveThirtyEight.