Why the GOP Will Raise Taxes

Mitch Daniels is not a communist, a socialist, or even a garden-variety liberal. On the contrary, he's a conservative Republican who's served at the pleasure of two Republican presidents (Ronald Reagan, George W. Bush) and now occupies the Indiana governor's mansion. He's even seen in some GOP circles as a potential 2012 presidential nominee. And yet when I asked Daniels earlier this month whether the federal government might have to raise taxes at some point in the future—regardless of which party was in power—his answer was yes.

"At some stage there could well be a tax increase," he said. "If you believe our fiscal mess is republic-threatening, and if you have to take the third- or fourth-best approach, at the end of the day, I'd do it."

Welcome to Grover Norquist's worst nightmare. For the last 20 years, no one principle has united the Republican Party quite like its violent opposition to tax increases—except, perhaps, its equally ardent obsession with tax cuts. When liberal economist Paul Krugman described the GOP as a horde of "tax-cut zombies" just "shambling forward, always hungry for more," he wasn't far off; every election cycle, Norquist's Americans for Tax Reform forces candidates to sign a "no new tax" pledge, and holdouts risk being publicly ridiculed for not signing. But now there are indications that at least some Republicans, like Daniels, are awakening from their stupor. As the crippling recession and mounting long-term deficit projections inspire new calls for fiscal austerity, especially from the Tea Party types currently driving the GOP's agenda, it's worth asking whether we're about to witness the biggest change in conservative politics since the rise of Reagan: the beginning of the end of the Tax Zombie Republican.

To get a sense of how such a staggering shift could be possible, let's rev up our DeLoreans, restart our flux capacitors, and return to the roots of modern-day Republicanism. Among conservatives, Ronald Reagan is remembered as the tax-cutter in chief: the supply-side hero whose Economic Recovery Tax Act of 1981 slashed the top marginal tax rate by more than half. But the truth is that after his first year in office, Reagan was actually willing (if not always happy) to compensate for gaps in the government's revenue stream by raising rates. In 1982, for example, he agreed to restore a third of the previous year's massive cut. It was the largest tax increase in U.S. history. The Gipper also raised taxes in 1983. And 1984. And 1986. The party sainted him for his efforts.

That permissiveness ended with Reagan's successor, George H.W. Bush. While campaigning for president in 1988, Bush made a solemn promise: "no new taxes." But in 1991 he accepted a small tax hike as part of a major deficit-reduction package. Conservatives—who'd become militantly, monolithically antitax in the Gipper's wake—were enraged. Never mind that the package paved the way for the booming economy and balanced budgets of the 1990s, much as Reagan's apostasies coexisted peacefully with the steady growth of the previous decade. Bush lost the right, and then reelection. Ever since, only the rarest of Republicans has dared to deviate from GOP dogma on taxes—even as the party's absolutism (see: Bush, George W.) spawned record deficits and squandered its reputation for fiscal responsibility.

Why would that change now? Because for the first time in the past two decades, the math—both fiscal and political—might require it. In 2009 the national debt was 53 percent of GDP. That's less than ideal. But it's nothing compared with the projected 2050 debt: 350 percent of GDP. Economists say that closing the gap, which stems from long-term forces like rising health-care costs and the retiring of the baby boomers rather than fleeting issues like President Obama's stimulus package, will require both lower spending and higher taxes. And while Republicans tend, at least in theory, to support spending cuts next year, and the year after, it will be impossible to keep cutting through year 40 and beyond. Right now, the United States spends less as a share of GDP than all but nine of its 31 fellow OECD nations; our revenue intake, meanwhile, ranks next to last, with 2009's taxes slipping to their lowest level as a percentage of personal income since 1950. There isn't much left to cut on either side of the equation, and forecasters predict that our economic growth may be slowing for good. If we're serious about tackling the debt, we will eventually need more revenue.

Which is where politics comes into play. Pundits like to explain the Tea Party as a reaction to Obama's overspending. But the movement's animosities actually go farther back. As National Review's Kevin Williamson has noted, what activists "are really looking for is an alternative to the establishment Republicans, whom they distrust, with good reason, when it comes to the bottom-line question of balancing the budget and getting our fiscal affairs in good order." For them, Dubya redux won't do. Instead, it will be fiscally mature Republicans—the ones willing to acknowledge, as Williamson puts it elsewhere, that "tax cuts don't get us out of the spending pickle, and growth isn't going to make the debt irrelevant"—who wind up getting the biggest boost from this new grassroots appetite for austerity. There's a reason Paul Ryan is suddenly so popular.

To be sure, Republicans will never like—or campaign on—tax hikes; even now, they're pushing to extend the Bush tax cuts in their entirety. (Few experts support raising rates during a recession.) But as the debt grows, penny-pinching may become a bigger priority than opposing new taxes. The more that conservative activists and thinkers reject starve-the-beast, supply-side absolutism in favor of tough, practical budgeting, the thinking goes, the more room their representatives in Washington will have to strike the sort of deficit-reduction bargains--serious spending cuts paired with targeted tax reforms--that Ronald Reagan and George H.W. Bush struck not so long ago.

Given that the entire country, and not just Tea Partiers, is in a belt-tightening mood, the political upside could be considerable. According to a Pew poll from late July, 58 percent of Americans want to repeal either some or all of the Bush tax cuts—which means that for the first time in years, mainstream voters are at least willing to consider tax increases. Once Republicans return to power, perhaps as a result of Democratic exorbitance, they will have a golden opportunity. By proposing substantial, long-deferred spending cuts—Medicare? Social Security? defense?—the GOP could revive its reputation as the party of fiscal responsibility and win back moderates (and likely some young voters, who will be glad to dodge the baby-boom bullet). If Republicans have to accept minor tax increases from the other side of the aisle in order to get their proposals passed—reluctantly, like Reagan—then so be it. 'Tis a small price to pay for, you know, saving the country.

Sounds implausible? Then consider how the next crop of GOP leaders has behaved when tasked with balancing a budget. Eight days after taking office as governor of Indiana in 2005, Mitch Daniels pitched a sizable tax hike on all individuals and entities earning over $100,000. A few days later, Gov. Rick Perry of Texas, another potential presidential candidate, came out in favor of upping his state's franchise tax. Mike Huckabee raised taxes in Arkansas, as did Mitt Romney in Massachusetts. Even Congressional leaders are showing some flexibility. Ryan has proposed a plan to make the Bush cuts permanent, but he's also said he'd accept a brief, two-year extension—after which they'd be up for reconsideration. Sen. George Voinovich of Ohio, a longtime fiscal hawk, recently criticized his fellow Republicans for signing Norquist's anti-tax pledge, saying increases should be on the table. Meanwhile, reports from inside President Obama's bipartisan deficit commission—a simulation of the bruising budget debates to come—note that Republicans have "mostly held their fire" on taxes. Just last Thursday, in fact, one member of the group, Rep. Jeb Hensarling (R-TX) told the Wall Street Journal that he opposes tax hikes but "wouldn't rule anything out at this stage in the discussions." Otherwise, he said, "The thing blows up before it has a chance to work."

Perhaps that's just posturing: a concession to the politics of the moment. Perhaps those politics will change, and everyone will forget all about our looming fiscal crisis. But don't count on it—and don't be surprised to see a Republican president affixing his Hancock to tax increases someday, or a Republican Congress passing them. The zombies, of course, will moan. But it may be the last we ever hear from them.