Rudy Giuliani's strategy to win the 2008 Republican presidential nomination seems fairly straightforward: 1) use his 9/11 "America's mayor" reputation to win the national-security conservatives; 2) promote his record of reforming New York City--including cutting taxes and balancing the budget--to win fiscal conservatives; 3) make himself acceptable to social conservatives by promising to appoint Supreme Court justices like Antonin Scalia and Samuel Alito who just might vote to toss out Roe v. Wade. Of course, it's appealing to that last group that is most problematic for Giuliani given his liberal record on social issues, particularly abortion. (And it's Fred Thompson's simultaneous appeal to all of those groups that has helped generate presidential buzz for the actor-politician.)
Yet Giuliani could use tax policy to appeal to social conservatives, say Republican insiders I've spoken with. So far on the tax issue, Giuliani has promised to permanently extend the 2001 and 2003 Bush tax cuts, and he spoke favorably about the idea of a flat tax after Steve Forbes joined his campaign. But he has not actually endorsed a flat tax or any other major tax reform. On his website and in campaign appearances, Giuliani has been touting himself as a "supply-sider."
Now among conservatives, there is a division between those who see lower taxes primarily as a way of promoting economic efficiency and growth and those who see lower taxes as a way of promoting certain social goals but not necessarily boosting the economy. Pat Toomey, president of the influential Club for Growth, takes the former view, recently telling me that Republicans should be for cutting taxes "whenever and wherever they can." And here is how supply-sider Paul Hoffmeister, chief economist at Bretton Woods Research, described his take on tax cuts to me in an E-mail today:
" Cutting taxes, especially those on capital gains and dividends, is one of the most important things the federal government can do for the country today because it would unleash capital to productive uses, and thereby raise the standard of living for all. "A rising tide lifts all boats!" For example, people can dig holes with their hands or shovels. But if incentives are increased so people can be provided with bulldozers, then everyone from the financier to the laborer benefits--due to the increased output from investment and the higher wages paid."
Ramesh Ponnuru, a senior editor at National Review, takes the other side of the trade, advocating that the best way for Republicans to appeal to voters--giving the current fiscal and political environment--is by offering family-friendly tax cuts. (In a recent chat, Ponnuru admitted that his view is still "a minority viewpoint.") As he wrote recently, his plan:
" . . . would expand the tax credit for children to $5,000, replace the standard deduction with a tax credit, and eliminate almost all itemized deductions. It would get rid of most tax credits and the alternative minimum tax. It would cut tax rates on estates, capital gains, and dividends. It would feature two tax rates instead of the current six: The top rate would be 30 percent, and taxpayers in the lower bracket would pay 15 percent. . . . The result wouldn't be the flat tax or national sales tax of supply-siders' dreams. But it would bring their dreams a little closer to reality than could otherwise happen, and promote some goods--such as recognition of the financial investment that raising kids represents--to which supply-siders have too often been blind."
Indeed, Phillip Longman, a senior fellow at the New America Foundation and author of The Empty Cradle, an analysis of the potentially devastating economic impact of falling global birthrates, explained as much in a Foreign Affairs article based on his research:
"In the United States, the direct cost of raising a middle-class child born this year through age 18, according to the Department of Agriculture, exceeds $200,000--not including college. And the cost in forgone wages can easily exceed $1 million, even for families with modest earning power. Meanwhile, although Social Security and private pension plans depend critically on the human capital created by parents, they offer the same benefits, and often more, to those who avoid the burdens of raising a family."
Among his many possible solutions to the problem of falling birthrates and aging global population, Longman advocates that Uncle Sam should relieve parents from having to pay into Social Security. He argues that by raising and educating their children, "parents have already contributed hugely (in the form of human capital) to these systems. The cost of their contribution, in both direct expenses and forgone wages, is often measured in the millions. Requiring parents also then to contribute to payroll taxes is not only unfair, but imprudent for societies that are already consuming more human capital than they produce."
Now Rudy doesn't have to go that far. But by advocating a big increase in the child tax credit, as the social conservatives desire, and pushing for lower capital-gains and corporate taxes, the latter among the world's highest--as the supply-siders want--Giuliani would have an economic platform that would tie together various strands of the GOP. Plus this approach might seem to the general public more fiscally responsible and politically feasible than simply advocating a big cut in marginal rates or tossing out the current tax code in favor of a flat tax or consumption tax. Of course, die-hard supply-siders grimace at all this, claiming that the Bush tax cuts are responsible for the huge drop in the budget deficit during this current expansion. As economist Lawrence Kudlow, host of CNBC's Kudlow & Co. wrote in his always insightful blog.
"As a supply-sider and "Laffer Curve" devotee, I would argue that the best way to raise revenues to balance the budget is to reduce marginal tax rates. . . . Tax revenues have been surging from personal incomes, capital gains, and dividends. Now, the Congressional Budget Office would try to argue that these revenues are lower than would have been the case if taxes had not been cut. But who's to say? Economic growth would've been slower and hence revenues without tax cuts might have been lower. All we know is what we know--namely, revenues have been steadily rising in the aftermath of lower tax rates. This view is at odds with Washington's official scorekeepers. But Republican presidential candidates should be out making this point. Rudy Giuliani hinted at this in my CNBC interview. Mitt Romney is close to it. "
Which GOP candidate will pull trigger first on a bold tax plan? Right now, it seems more pertinent to ask if any of them will do it.