The Maryland Public Policy Institute
The 2012 general election campaign officially begins late next month with the opening of the Republican National Convention, followed a week later by the Democratic Convention. The parties’ presumed presidential nominees, Barack Obama and Mitt Romney, are already hard at work on the campaign trail, telling voters that this November’s election is a pivotal choice between contrasting philosophies of government. So far, the American electorate has not pivoted toward either the Republicans or the Democrats: polls show the contests for both the White House and control of Capitol Hill are wide open.
To help both parties, I have some suggestions for how Republicans and Democrats can improve their politics and policies. Below are suggestions for Republicans; next month’s column will be for Democrats.
Realize that tax cuts aren’t a panacea. In 1974, a University of Chicago economist named Art Laffer explained a simple idea to some members of Gerald Ford’s administration: There is an optimal level of taxation. If taxes are set below that level, government revenues will fall; but if taxes are set above that level, government revenues will also fall because taxpayers will have less incentive to earn money and more incentive to avoid taxation (both legally and illegally). No one on the political left or right should support taxes set above the optimal level because that would depress the economy, reduce government revenue, and divert resources toward clever tax accounting and lawlessness.
The notion of an optimal tax rate is as correct as it is simple. But it has spawned two oft-repeated ideas that aren’t correct: that tax cuts always “pay for themselves” by boosting the economy and thus government revenue, and that tax cuts always provide a large boost to the economy. Sometimes those benefits result from tax cuts, if economic conditions are right, but other times they do not. Yet many Republicans have come to see tax cuts as a panacea for all economic and fiscal woes at all times.
There are good arguments for lowering taxes (namely that people deserve to keep what they’ve earned, and government spending often yields less benefit than private spending), but the “economic panacea” argument isn’t one of them.
Focus on spending. George W. Bush argued for his first-term tax cuts, in part, by saying they would shrink government’s size and spending by “starving the beast.” But he then created a new federal agency (the Department of Homeland Security), a new entitlement (Medicare Part D), launched two wars, expanded federal involvement in schools, and rang up $4.9 trillion in debt.
When government can borrow money easily, tax cuts do little to restrain government. If anything, they help government to grow because lower taxes reduce voters’ motivation to rein in government expansion.
But future taxpayers will have to pay those debts and other government obligations. The Congressional Budget Office’s most recent long-term fiscal outlook report shows just how enormous those costs will be if they aren’t soon contained. Republicans must get serious about reducing government spending and changing the relationship between government and taxpayers.
Remember that “limited government” applies to Republicans too. The most encouraging recent development in the Republican Party is its renewed interest in the philosophy of limited government—the idea that government should only involve itself in matters that people can’t handle privately. As I explained in an earlier column, limited government nurtures peace and prosperity in diverse nations like the United States because it protects citizens’ freedoms while requiring them to negotiate privately for mutual benefit.
It’s understandable why Republicans would support limited government after the past few years of the Obama administration. The question is, would they maintain that support following a GOP victory in November, or would they use big government to advance Republican goals? Government should not be used as a weapon in the social and culture wars, nor serve as a scorekeeper. Thus, limited government protects Republicans from Democrats’ social and culture goals, and Democrats from Republicans’.
A platform of fiscal responsibility and limited government that protects individual liberty would be attractive to voters. I hope Republicans adopt it.
 Jude Wanniski. “Taxes, Revenues, and the ‘Laffer Curve.’” Public Interest 50:3-16 (Winter 1978).
 U.S. Department of the Treasury TreasuryDirect database. “The Debt to the Penny and Who Holds It: Daily History Search Application.” http://www.savingsbonds.gov/NP/BPDLogin?application=np. Accessed July 17, 2012.
 William A. Niskanen. “Limiting Government: The Failure of ‘Starve the Beast.’” Cato Journal 26(3):553–558.
 Congressional Budget Office. The 2012 Long-Term Budget Outlook. Washington, D.C.: Congressional Budget Office. June 5, 2012.
 Thomas A. Firey. “Diverse Nation Needs Limited Government.” Herald-Mail (Hagerstown, Md.). July 19, 2011.