Ajay K. Mehrotra –
To combat the coronavirus pandemic, the federal government has enacted relief packages totaling nearly $2.5 trillion, with more aid likely to come. The fourth and latest effort contains $75 billion in grants for hospitals, and $25 billion to improve coronavirus testing. As economist Austan Goolsbee has rightly noted, “the number one rule of virus economics is that you have to stop the virus before you can do anything about economics.”
At some point, though, there will have to be a fiscal reckoning. The mounting bills of an unprecedented global healthcare crisis and its economic aftershocks will eventually come due. Indeed, commentators have already begun proposing ways to address the impending budgetary shortfalls while tackling economic inequality: from a one-time wealth tax on the wealthiest Americans to a progressive wealth tax for Europeans to an excess-profits tax on the large corporations profiteering from the crisis.
Yet, any possible tax hike in the United States will need to contend with the historical forces that, over the last four decades, have ushered in an equally unprecedented tax-cutting fervor. While now may not be the time to raise taxes, when the time does come, law and political economy activists and experts alike will have to confront the current political fervor for tax cuts. In her most recent book, Starving the Beast: Ronald Reagan and the Tax Cut Revolution, economic sociologist Monica Prasad explains how we got here, how the United States, unlike most other advanced industrialized countries, has abandoned any notion of fiscal discipline and instead embraced tax cuts and deficit spending as the answer to every economic and political dilemma.
Starving the Beast can be seen as the third book of a trilogy, following Prasad’s other award-winning monographs The Politics of Free Markets and Land of Too Much. In her latest installment of twentieth century comparative history, Prasad chronicles a fundamental transformation in American tax law and political economy – a transformation led by the Republican Party that culminated with the Reagan Revolution. And one that continues to reverberate today, even during our current crisis.
Most conventional accounts of the rise of modern American conservatism and the shift in GOP economic policy focus narrowly on the political power of big business, or the ideas and influence of libertarian intellectuals, or racial backlash against increased social-welfare spending. By contrast, Prasad provides a broader more complicated historical explanation. Building on her earlier scholarship, Prasad shows that the path-dependent, early twentieth-century U.S. reliance on income, profit, and capital gains taxes laid the groundwork for a distinctive American system of law and political economy that was more hostile to business than Western European nation-states, where sales taxes and lighter capital regulation were more dominant.
These comparative differences were less salient during the so-called “golden age” of post-World War II American capitalism. But the economic crisis of the 1970s – the combination of skyrocketing inflation and stagnant output – triggered tremendous financial anxiety and frustration in the United States, much of it aimed at the tax system. Stagflation also led to an intellectual crisis, as experts and policymakers began to question the fundamental premises and tenets of classical Keynesian economics.
The Republican Party, newly desperate to find winning electoral issues in the wake of Watergate and President Richard Nixon’s resignation, used these crises and turned to tax cuts as its route to power. Charismatic, entrepreneurial politicians like New York Congressman Jack Kemp led the way in exploiting the economic and intellectual crisis to forge a new political coalition, with Ronald Reagan in the lead. That powerful coalition elevated supply-side economics, with tax cuts and deficit spending at its core.
While much of Prasad’s analysis is focused on the origins of the 1981 Economic Recovery Tax Act – the landmark Reagan tax law that initiated the federal tax cut revolution – it’s the implications and legacy of those tax cuts that are most relevant for today’s fiscal challenges. Prasad concludes, perhaps prematurely, that the thorough-going success of the Reagan revolution has completely eliminated the possibility of budget-balancing, rational tax increases. “No significant force currently argues that taxes need to rise on the middle classes,” Prasad writes. “On this question the Reagan victory has been so successful that the enemy has ceased to exist.” The Reagan tax cuts are thus, “a central episode, perhaps the central episode in the rise of economic conservativism in American since the 1970s.”
Prasad’s emphasis on how key Republican lawmakers seized the opportunity created by economic and intellectual crisis illustrates the importance of historical contingency and provides an important lesson for today. Although Prasad does not draw many explicit normative conclusions from her comparative-historical narrative, the message is clear: the current Republican tax cut fervor is a product of human agency, created by pivotal policymakers exploiting a malleable moment of uncertainty and fear. In short, there is little about the current era of tax cuts that was inexorable or inevitable.
In some ways, we are currently facing a similar type of crisis, a moment of great doubt and anxiety about the future. While the trigger today has been the spread of a global pandemic, rather than skyrocketing inflation, the economic aftereffects are likely to be familiar: months or years of economic stagnation, increasingly high unemployment, and growing social malaise. Traditional Keynesian economic policy would suggest that now is not the time to raise taxes (and during a crisis we’re all Keynesians after all). But there will come a time, perhaps in the near future, when the present disruption subsidies, to reconsider the hard fought, yet almost forgotten,
To be sure, not all crises lead to paradigm shifts in law and political economy. The 2008-09 financial crisis and subsequent Great Recession did little to change the tax cutting fervor or the solicitude for free markets. Still, one can imagine an alternative scenario based on Prasad’s historical tale – a scenario where creative, progressive lawmakers and political leaders seize the opportunity provided by this crisis to harness a newfound social solidarity to increase taxes. That should not happen soon. The primary rule of virus economics remains stopping the virus before focusing on the economy. Still, in this historic moment of self-sacrifice and national solidarity, when almost everyone acknowledges the need for unity and cohesion, challenging the current tax cutting paradigm might be too good an opportunity to pass up.
Ajay K. Mehrotra is Executive Director and Research Professor at the American Bar Foundation and a Professor of Law & History at Northwestern University. He is the author of Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877-1929.