On Tax Day, Tax-Cutting Candidates Take Center Stage

By Tax Day, April 15, Americans have spent an average of 27 hours filling out their tax returns. Tax collections are at a record high. The government's numerous encounters with the debt ceiling and a potential default have placed fiscal policy front and center in this year's midterm elections.

Running on a platform of lower taxes, a new crop of candidates is challenging established politicians. A case in point is attorney Grant Lally, running against Representative Steve Israel, the chairman of the Democratic Congressional Campaign Committee, the campaign arm of the Democratic House leadership.

On Sunday, Israel told CNN's Candy Crowley that not all House Republicans are racist, but that "to a significant extent, the Republican base does have elements that are animated by racism, and that's unfortunate."

These comments might not sit well in Israel's New York's 3rd district, which is on the northern part of Long Island, encompassing parts of Queens, Nassau, and Suffolk counties. Its residents are evenly split between Republicans and Democrats, and have median household income of $96,000.

The Cook Political Report gives the 3rd district an even partisan voting index, meaning that the district does not lean towards either party. President Obama won the district by one point in 2012, though Rep. Israel has never been reelected with less than 56 percent of the vote. In over half a dozen districts that are as unfavorable if not more so towards Republicans, Republicans hold the seat.

Lally is a criminal defense attorney who ran against then-Congressman Gary Ackerman in 1994 and 1996. In the Republican primary, he will face Stephen Labate, who lost to Israel in 2012 after running a lackluster campaign. It turns out that Labate is a former Israel surrogate, who did not try too hard to defeat his mentor. Labate does not even live in the 3rd district, so he would not be able to vote in his own primary election.

Lally wants to reduce and simplify individual and corporate tax rates and eliminate the estate tax. He has proposed three individual rates, 10 percent, 25 percent, and 28 percent. He wants to lower the capital gains tax to 15 percent, and the corporate tax rate to 20 percent.

In a telephone conversation on Monday, Lally explained to me that America is overtaxed. The rest of the world has learned that lower taxes mean faster growth. Countries such as Estonia have put in place flat taxes, yet America has been left behind. America is growing at a snail's pace, partly due to its high taxes.

The academic evidence is on Lally's side. Many eminent economics professors have shown that lowering individual and corporate income taxes is the key to increasing incentives for Americans to work and for businesses to invest.

Professors Jonathan Gruber of MIT and Emmanuel Saez of the University of California (Berkeley) have found that people at the upper end of the income distribution are highly responsive to changes in tax rates, more so than those at the middle and lower end. Their research shows that lowering top tax rates in France would encourage upper-income earners to work more.

Nobel Prize winning economist Edward Prescott found that in the 1970s the labor supply of France, Germany, and the United Kingdom exceeded that of the United States. In the 1990s, Americans worked much more than Europeans. He discovered that when tax rates of European countries and the United States were comparable, their labor supplies were comparable as well. Prescott concluded that the difference in the marginal tax rate accounts for the large change in relative labor supply over time.

Similarly, Professors William Gentry of Williams College and Glenn Hubbard of Columbia University found that higher marginal tax rates discourage entrepreneurship. Entrepreneurship involves risk-taking, and people are less willing to take risks when the rewards will be taxed away. A five-percentage-point reduction in tax progressivity would increase the entry rate by 25 percent.
The increase in taxes in America in 1993, they found, lowered the probability of people becoming self-employed by 20 percent.

University of California economics professors Christina and David Romer, in a 2010 article in the American Economic Review, concluded that "a tax increase of 1 percent of GDP reduces output over the next three years by nearly three percent." Christina Romer was chair of President Obama's Council of Economic Advisors.

Lally might be right on taxes, but his last campaign in 1996 ended with a hefty fine from the Federal Elections Commission. The FEC initially exonerated him in an investigation. But then Lois Lerner, who worked for the FEC before she spearheaded the IRS crackdown on conservative groups, reopened the case. Lally was forced to settle to avoid a lengthy legal dispute which could have bankrupted his law firm.

At first sight, Lally's campaign looks like a long shot. After all, Steve Israel is a heavily-entrenched incumbent with significant fundraising ability. However, with nationwide frustration at polarization in Washington, Israel's position as the leader of a hyper-partisan organization that aims solely to wage war on Republicans will do him no favors in this swing district.

Israel voted for most, if not all, of Obama's tax increases. Israel will have to defend his legacy of higher taxes, bigger government, and less individual freedom. It will not be easy.