The Republicans And Taxes: The Donor Class Doesn’t Seem To Be The Biggest Problem

Matthew Schmitz has a terrific post which discusses Mike Murphy’s suicide-for-the-Republican Party idea that the Republicans should abandon social conservatives and focus on hard headed economic conservatism. Murphy’s post has been beaten up by better writers than me so I’ll focus on something else. Josh Barro says that the real Republican problem is that their economic agenda doesn’t appeal to the middle-class. Barro writes:

What are the “kitchen-table” economic concerns of the middle class? They’re high unemployment, slow income growth, underwater mortgages, and the rising cost of health care and higher education. Democrats have an agenda that is responsive to these concerns.

I agree with all of that, but I think Barro puts too much of the blame on the Republican donor class. Barro writes:

Have you spoken with a wealthy Republican donor in the last few years? By and large, they are outraged about Obamacare, easy money and stimulus spending — that is, at policies aimed at easing middle class families’ economic situations. They are often delusionally convinced that the country faces imminent economic collapse. What they believe will prevent that collapse is tight money, spending cuts and continued tax cuts for the rich.

I don’t think that matches up with the behavior of the Republican presidential candidates in the last cycle. Who was the Republican presidential candidate with the most donor support?  Mitt Romney.  Romney was also the major Republican presidential candidate who was the least critical of Ben Bernanke. It was Ron Paul, Rick Perry and Newt Gingrich who were the most hostile to the Fed’s expansionary policy. The dynamics of the race didn’t look like the candidates trying to play to their donor base on monetary policy. It looked like the candidate of the donors trying to navigate a primary electorate that was concerned about inflation while leaving open the possibility of supporting an expansionary monetary policy if he got elected. In this case, the problem (if there was a problem), was with the voters rather than the donors.

Or take the issue of “continued tax cuts for the rich.” Other than Rick Santorum and Ron Paul, the tax cut proposals of the major candidates could fit into one of two categories. The first category would be Son of Reagan. Tim Pawlenty proposed abolishing the capital gains and dividend taxes and cutting income taxes across the board - including a 28% cut in the top marginal tax rate. Romney later proposed a smaller (but still large) 20% across-the-board income tax cuts. The second kind of Republican tax cut plan could be best described as a flat tax for the criminally insane. Rick Perry and Newt Gingrich proposed a two-tier tax system in which those who wanted to stay in the current income system could stay, while those who didn’t could switch to a  flat tax rate of 15% (for Gingrich) or 20% (for Perry.)  So you get to do your taxes twice and the prime beneficiaries of the optional flat tax system would be high earners. Both Perry and Gingrich proposed to eliminate most taxes on investment income. All of these proposals would have sharply cut taxes for high earners and those who make most of their money from investment income. It sure looks like the candidates were trying to give the donors what you would think the donors want.

But let’s look at the timing. Pawlenty came out with his tax cut plan when his campaign was stalled in June of 2011. It is plausible that Pawlenty came out with his plan for high earner tax cuts in order to appeal to Republican donors and improve his fundraising. That is not the only plausible explanation as we will see.

Now let’s look at Rick Perry. Perry came into the race with pretty good fundraising numbers. He was the only Republican to out raise Romney in any quarter. Donors liked him fine. Perry didn’t come out with his tax cut plan until after his poll numbers had collapsed after a series of disastrous debate performances. During the Republican race, Newt Gingrich was never a favorite of donors as a group. Gingrich got money from Sheldon Adelson, but his campaign never raised even half as much as Romney’s in any quarter of the race. The Romney Super PACs were better funded than Gingrich’s. Gingrich came out with his tax cut plan just as he was beginning to recover from his earlier-in-the-year collapse that happened as a result of calling Paul Ryan’s Medicare reform plan “right-wing social engineering.  Perry and Gingrich both unveiled their flat tax proposals in October of 2011 while their campaigns were both polling far behind Herman Cain and Mitt Romney.

Romney is the most interesting case of all. Romney was the clear winner among the donor class both in campaign donations and in outside expenditures. Romney’s original tax cut plan was far more modest than those of Pawlenty, Perry, and Gingrich. Romney proposed to cut the corporate income tax, but the rhetorical heart of Romney’s tax cut was a promise to eliminate taxes on any investment income received by the middle-class. This plan was partly a mirage as the middle-class’s tax liabilities are more likely to be from the payroll taxes than the capital gain or dividend taxes, but it is notable that the candidate with the most donor class support proposed the tax cut that benefited the donor class the least.

Even more interesting was when Romney changed his tax cut plan to include a 20% across-the-board income tax cut. Romney unveiled his 20% across-the-board income tax cut plan on February 22, 2012. That was a couple of weeks after Rick Santorum has swept the contests in Colorado, Minnesota and Missouri. At the time that Romney proposed his expanded tax cut plan, he was running about 5% behind Santorum in the RCP national polling average (not that the national polling average means much as other than a lagging indicator.) It was also a week before the make-or-break primary in Michigan. Romney didn’t need more money from donors. Romney had already carpet bombed Gingrich with ads twice. He was dumping huge negative ad buys on Santorum. Romney needed to reassure Republican primary voters that he was conservative enough.

My read is that the upper-income tax cut proposals that we saw in the 2012 race were not focused on getting support from donors. The large high earner tax cuts were a strategy used by Republican presidential candidates and their consultants to demonstrate conservative authenticity. The tax cut proposals were also largely failures or placebos. Tim Pawlenty and Rick Perry never won anything. Newt Gingrich had two huge recoveries in his poll numbers, but those were the result of debate performances where the other candidates left him alone to posture as the candidate of Republican unity who was willing to take on the liberal media. Romney overcame Santorum, but that was the result of Romney’s money, institutional support, and debate preparation, combined with Santorum’s lack of rhetorical discipline and campaign disorganization.

Looking at the 2012 Republican race, I don’t see any evidence that proposals to cut taxes on high earners helped any of the candidates with either Republican donors or primary voters. Republican primary voters (never mind persuadable general election voters) seemed uninterested in plans to cut taxes on high earners. So why propose those particular kinds of tax cuts? My guess is force of habit. When Republican consultants saw that their candidate was in a hole, their instinct was to dig out by offering some (usually radicalized) version of either the Reagan or the Steve Forbes tax plans. It wasn’t the only part of the 2012 Republican consultant playbook that turned out to be out of date.

But what about Herman Cain and his regressive 9-9-9 plan?  I’ll get to that tomorrow or the next day.

Update: Ramesh Ponnuru wrote back in January about how the Perry/Gingrich/Pawlenty tax cut proposals didn’t seem didn’t seem to be helping them win many votes.