Disagreeing with David Brooks on Taxes

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Back in the early ‘70s, a time well known now for confiscatory tax rates and a falling dollar, an economics textbook proclaimed, “The era of the entrepreneur may be over in terms of the individual owner-manager who single-handedly built up a large firm.” A few years later Bill Gates started Microsoft, a garage-entrepreneur venture that now employs 79,000, and which has made Gates the richest man in the world.

The untrue scribblings of textbooks past take on new relevance given the view of Republican-leaning columnist David Brooks that the GOP should shed its modern supply-side roots. In a recent New York Times piece, Brooks opined that, “Supply-side economics has had a good run, but continual tax cuts can no longer be the centerpiece of Republican economic policy.”

Owing to what Brooks considers a changing Republican electorate, policies must shift given his belief that, “The entrepreneur is no longer king.” Instead, with anxiety levels rising among America’s middle class, the “wage-earner” has taken away the king’s crown. The contradictions in this presumed abdication are many.

First off, to whom should workers give thanks for their wages other than to entrepreneurs? Any policy centered on wage earners that doesn’t elevate the entrepreneur is the equivalent of cheering sunlight while ignoring the role of the sun. You can’t have one without the other, and it is entrepreneurs who sense unmet needs in the marketplace, attract the capital necessary to fulfill those needs, and who deploy that capital in myriad ways, including for the purpose of hiring the less entrepreneurially minded among us.

Touched on above is the truth that entrepreneurs can only innovate and hire if capital is plentiful. And as very few prominent businesses today can attribute their success to the Small Business Administration, entrepreneurs find themselves reliant on individuals willing to forego current consumption in favor of the often distant object of investment success. Of course, the amount of investment capital made available for job-creating businesses is directly correlated with how much or how little governments take from the current and future earnings of individuals. In short, without free capital there are no wages to begin with, so for Brooks to go wobbly on cutting tax rates is for him to implicitly suggest that wages should fall altogether.

Brooks might argue that Republican policy should be concentrated on the large and established wage-paying businesses in the U.S. versus the various small firms that dot the landscape, but that’s a distinction without much of a difference. All businesses, from old-guard institutions such as Ford Motor Co. and the New York Times Co. to modern capitalist marvels such as Amazon and Google, were once entrepreneurial ventures that started out small.

To the extent that there’s a difference, it reveals itself in the multiples investors will pay for the earnings of the old versus the new. It is there that we see what investors truly value, and the simple fact that they value the future earnings of Google far more than they do those of Ford speaks volumes to the staggering importance of entrepreneurs to our economy. Successful entrepreneurs attract capital, and the latter funds jobs.

For evidence of what economies look like when they’re entrepreneur-deficient, we need only look to Michigan, where the Republicans held a primary just this week. The state’s dismal outlook speaks to the folly of de-emphasizing the entrepreneur to the alleged benefit of the wage-earner. Politicians in Michigan have been doing this for decades; vainly attempting to save the jobs provided by sclerotic, old-economy automobile behemoths of yesteryear, all the while keeping taxes so high that entrepreneurs with new ideas have taken their skills elsewhere. At present the state has the nation’s highest rate of unemployment to show for all of its efforts. It says here politicians of either party won’t be talking economic “Marshall Plans” when their campaigns take them to entrepreneurial hotbeds Palo Alto, Cambridge and Austin.

Ideology aside, Brooks reasons that tax cuts must be shelved in order to pay for unfunded promises made to an “aging society,” not to mention the costly nature of new campaign promises made by allegedly enlightened Republicans which include wage subsidization, birth savings accounts, federal 401(k)s, and “personal re-employment accounts.” If we ignore for now how far afield some Republicans have strayed from the Party’s ideological moorings, it should at least be remembered that as federal revenues have pretty consistently amounted to 18 percent of GDP irrespective of the tax rate, the policy answer for newly generous Republicans should not be one of shunning tax cuts.

Instead, with Republicans apparently planning to shower all manner of new entitlements on their voters, the importance of the entrepreneur and tax cuts becomes even greater. Somehow these programs will have to be paid for, and as successful entrepreneurs by definition create wealth and high-paying jobs, the U.S. will need a flush tax base to fulfill the promises made by its politicians.

Brooks thinks differently, and applauds the Republicans who “are shifting focus right now” from a tax-cutting, entrepreneur-focused ethos that as recently as 2006 had the Party in control of all three branches of the federal government. Perhaps channeling this new focus yesterday, President Bush signaled his willingness to put off extension of his 2003 tax cuts in return for quick passage of an economic "stimulus" bill that promises not to stimulate. The Dow Jones Industrial Average quickly fell 300 points. The market's mood suggests investors are far less sanguine than Brooks about the new path taken by certain Republicans.

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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