The Santa Claus Theory of Tax Cuts

In the mid-1970s, the GOP was adrift, demoralized, and divided amid both the post-Watergate backlash and the Republican president Gerald Ford’s attempt to raise taxes in pursuit of halting inflation and plugging federal budget holes. A young journalist named Jude Wanniski had an epiphany when at a lunch meeting, he watched the economist Arthur Laffer draw a curve on a napkin to argue to Ford staffers Dick Cheney and Donald Rumsfeld that cutting taxes could raise government revenues.

Two years later, Wanniski penned a grand unifying “Santa Claus Theory,” arguing that Republicans had “continued to play Scrooge” by focusing narrowly on budget austerity and unpopular spending cuts, without offering voters the gift of tax cuts.

He concluded: “Republicans, traditionally the party of income growth, should be the Santa Claus of Tax Reduction” — and he said they should remember that “the first rule of successful politics is Never Shoot Santa Claus.”

It was a revelation for a new generation of conservatives seeking to create a sunnier, more optimistic image for the GOP in the wake of Republican Sen. Barry Goldwater’s cranky presidential campaign and President Richard Nixon’s downfall. Younger, more telegenic Republican leaders such as then representative Jack Kemp (R-NY) passed the essay around to colleagues, urging them to reimagine tax cuts not solely as a means to demonize government, but also as a way to court the working class with promises of life-bettering benefits.

The dual message of so-called “supply-side economics” soon found its Santa Claus in anti-tax governor turned anti-tax president Ronald Reagan.

“As government’s hunger for ever more revenues expanded, families saw taxes cut deeper and deeper into their paychecks,” Reagan said before signing federal legislation to cut the top marginal tax rate. “This tax bill is less a reform than a revolution. Millions of working poor will be dropped from the tax rolls altogether, and families will get a long-overdue break with lower rates.”

High-income tax cuts became the Republican Party’s economic policy priority — and depicting such gifts to the wealthy as a boon to the working class became the GOP’s political strategy. Indeed, Reagan, George W. Bush, and Donald Trump each championed tax-cut legislation that delivered disproportionate benefits to the rich and fueled an explosion of economic inequality — all while presenting their agenda as fight-for-the-little-guy populism.

“I promised we would pass a massive tax cut for the everyday, working American families who are the backbone and the heartbeat of our country,” Trump said on the eve of signing his $1.9 trillion tax cut bill in 2017. “We’re just days away [from] keeping that promise and delivering a truly amazing victory for American families. We want to give you, the American people, a giant tax cut for Christmas.”

Many political prognosticators assumed this now-familiar sales pitch would always be effective. But survey data suggests that over the last few decades, most Americans have come to realize that while Tax Cut Santa Claus has been stashing big gifts under billionaires’ Christmas trees, he’s been leaving everyone else’s stockings empty.

Whereas more than half of Americans approved of Reagan’s first major high-income tax cut proposal, only about a third of Americans approved of Bush’s similar tax proposal at the same time in his presidency. By the time Trump assumed office for his first term, less than a third of Americans supported his high-income tax cut initiative, knowing that such policies have failed to benefit them personally or boost the macroeconomy.

“The Times Are Totally Different”

Fast-forward to Trump’s second term. In previous eras, a new Republican president delivering more tax cuts for the wealthy would be a foregone conclusion under Wanniski’s Santa Claus theory. But that political hypothesis is now buckling under the weight of Republicans’ new $4.5 trillion proposal to extend Trump’s 2017 tax cuts.

In its current form, the GOP initiative would deliver more than half its benefits to the richest 10 percent of the country. Coupled with spending cuts and tariffs, Trump’s agenda would deliver a big income boost to the top 1 percent, while reducing the income of the bottom 80 percent, according to the Center on Budget and Policy Priorities.

As Trump’s legislative agenda hits Congress, opposition to more high-income tax cuts is strong not just among Democrats and independents, but also among Republicans. Morning Consult reports that 70 percent of GOP voters believe “the wealthiest Americans should pay higher taxes” — a whopping 8-point jump from six years ago. Moreover, “roughly seven in ten voters, including two in three Republicans, support proposals to raise taxes on earners making more than $400,000.”

Republican leaders are responding to the backlash with the previously unthinkable: proposals to raise some taxes on the rich. Trump reportedly floated the idea, and some GOP lawmakers are considering creating a new top tax bracket.

This has touched off an intraparty civil war. On one side are those who came of age in the Reagan and George W. Bush epochs — Sen. Newt Gingrich (R-GA), Sean Hannity, former vice president Mike Pence (R), Americans for Tax Reform’s Grover Norquist, hedge-funder-turned-GOP-senator Dave McCormick (PA), and the Club for Growth’s Stephen Moore. This old guard believes Republicans can still get away with depicting billionaire giveaways as populism and vilifying tax hikes on the rich.

“It’s vicious and full of envy. It’s a dumb idea. It’s bad for the economy,” said Norquist, who spent the last quarter century pressing Republicans to sign pledges to oppose all tax increases. “What happened when George Herbert Walker Bush raised the top rate? Let’s see, he lost the next election. We lost House and Senate seats and taxes went up and we had a recession.”

On the other side are newfangled MAGA voices — the former Mitt Romney staffer Oren Cass, Vice President J. D. Vance, the former Trump strategist Steve Bannon, and reportedly Trump’s budget director, Russell Vought. They sense political peril in Republicans presenting themselves as populists while their party enriches billionaires and corporations.

“We have to increase taxes on the wealthy,” Bannon said in December. This month, he said conservatives must prove “Republicans are not the country-club Republicans,” which is “why it’s so important to not extend the tax cuts for the wealthy and actually do more tax cuts for working-class people.”

Of the old anti-tax crowd, Bannon added: “They’re arrogant and they refuse to look at the reality of the situation we’re in. . . . The times are totally different.”

“Didn’t We Already Give Them a Break at the Top?”

Of course, we’ve been at these junctures before — moments when Republicans seemed to sense political vulnerability on taxes.

In 1985, Reagan tried to deflect Democrats’ criticism of his tax policy by insisting that “there is one group of losers in our tax plan — those individuals and corporations who are not paying their fair share or, for that matter, any share. These abuses cannot be tolerated.”

Similarly, George W. Bush momentarily pushed back against conservative aides pressing him to champion yet another tax cut for the rich. “Didn’t we already give them a break at the top?” he reportedly asked.

But the powerful anti-tax movement of those eras convinced both Republican presidents to plow forward. Reagan followed up his first tax cut by further reducing the top tax rate, and Bush’s sequel to his first tax cut was slashing taxes on corporate dividends.

Trump could end up doing much the same. After all, ramming more tax cuts for the wealthy through Congress is the surest way for the president to enrich himself, his family, and the entire front row of his inauguration.

But this time around, the long-term politics of taxes are in flux. Running the same tax play would show a Republican president siding with oligarchs against the preferences of his own party’s rank and file that no longer buys the Santa Claus theory.

That’s a new and unpredictable dynamic — one that may finally begin weakening the anti-tax movement’s grip on power in the years ahead.