Tax Reform Is Splitting the GOP. It's Happened Before.
âIf we fail on taxes, that's the end of the Republican Partyâs governing majority in 2018 [and] probably the end of the Republican Party as we know it,â Sen. Lindsey Graham warned last month. But Graham should have a bigger fear: Passing tax reform could be the end of the Republican Partyâs governing majority and the end of the Republican Party as we know it.
Many Republicans are looking to Ronald Reaganâs 1986 tax reform for inspiration. President Donald Trump said in August that Reaganâs mix of reduced rates and brackets combined with revenue-raising loophole closures was âreally something specialâ and a model to emulate. (He neglected to mention that in 1991 he called it an âabsolute catastrophe for the country.â)
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But while the Tax Reform Act of 1986 may have been the crowning domestic policy achievement of Reaganâs second term, it was an electoral snooze. Two weeks after Reagan signed the bill into lawâ"and barnstormed the country to tout his achievementâ"Democrats romped in the midterm elections, netting eight Senate seats and seizing control of the upper chamber.
The New York Times credited overall âeconomic discontentâ and a favorabl e mapâ"not any sort of backlash from the tax billâ"for propelling the Democratsâ win. The bill was a thoroughly bipartisan effort, with majorities of both partiesâ caucuses voting in favor, making it hard for either party to gain an electoral edge from passage. Still, a Republican president pocketing a long-held conservative goal of slashing the top tax rate from 50 to 28 percent proved powerless to reverse the political winds.
Reaganâs tax reform did not destroy the Republican Party, as Reagan successfully passed the torch to his vice-president in 1988. But there is a more ominous episode in Republican tax policy history that should give the party pause: the 1909 âPayne-Aldrichâ tariff reform.
The law was spearheaded by Republican President William Howard Taft, shaped by a Republican-controlled Congress and passed with barely any Democratic votes. But this was no rubber-stamped partisan measure. Many compromises were required to bridge the GOPâs progress ive-conservative ideological divide, yet they only exacerbated it. A year after passage, Republicans lost control of the House and shed seats in the Senate. In 1912, the Republican Party literally cleaved into two.
What makes tax reform so hard for Donald Trumpâs Republican Party? The GOP is fractured in multiple ways.
Nearly all Republicans insist low taxes spur economic growth and indirectly produce more government revenue. But a longstanding divide remains between budget hawks who resist taking that logic too far and âsupply-sidersâ who place tax cuts above all else. The number of true budget hawks may have dwindled in the Republican caucus, but it only takes three of them in the Senateâ"say, Jeff Flake, Bob Corker and John McCainâ"to derail a deal, so their concerns still carry weight.
On top of that, the partyâs populist turn has attracted a new constituency into its coalition: âMarket Skeptic Republicansâ of whom many, according to Pew Research Fund, align with Trump on immigration but support higher taxes on corporations and the wealthy. In turn, House Republicans have flinched from lowering the top tax rate on millionaires, and the billionaire Trump has reportedly insisted while trying to sell his plan to Senate Democrats that his accountant told him, âYouâre going to get killed in this bill.â
Then there is the growing divide between free traders and economic nationalists. The initial draft of the House Republican plan aims to curtail offshoring with a 20 percent excise tax on multinational corporations that donât put their foreign subsidiaries under IRS jurisdiction. Americans for Prosperity, the political arm of the libertarian Koch brothers, fired a warning shot in response, telling House legislators that the provision âviolates the promiseâ from Republican leaders âthat they would not include such a consumer tax in their tax package.â
Because of these intra-party fault line s, attempts to find compromise inevitably pit industry against industry. Already, proposals to limit the overall cost of the tax cuts with various revenue raisers have attracted opposition from lobbyists representing small businesses, home builders, realtors and farmers (not to mention social conservatives, who are upset at the elimination of the tax credit for adoptive parents). With Republicans selling corporate tax reform as a boon to business that will boost the overall economy, a chorus of criticism from business interests would seem to undermine the case
These obstacles may be daunting, but they are not insurmountable. Taft navigated a wider ideological divide and a slew of business battles to enact his top legislative priority during his first year in office. It just ended up being a political disaster.
Tariffs were the federal governmentâs primary source of revenue for much of Americaâs history up until the Taft presidency, as the income tax was considered unconstitutional. Like taxes today, tariff policy animated the divide between Republicans and Democrats.
Populist Democrats tended to believe tariffs should be for revenue only, since veering into protectionism gouged consumers to benefit corporate executives. In 1892, Democrat William Jennings Bryan, then a congressman and not yet a three-time presidential nominee, condemned high tariffs in searing fashion: â[When] a portion of the proceeds of our toil is appropriated by somebody else without our consent, we are simply to that extent slaves, as much so as were the colored men.â
But for Gilded Age Republicans, in the words of historian Edmund Morris, protectionism was âthe holiest tenet of the party faith.â âWho are the consumers?â scoffed Republican Sen. Nelson Aldrich of Rhode Island during the 1909 tariff debate, âIs there any class except a very limited one that consumes and does not produce? And why are they entitled to greater consid eration?â
Aldrich was on the defensive because by 1909, the Republican Partyâs protectionist consensus had begun to fray. Much of the public was chafing at the steep tariffs enacted by President William McKinley in 1897, especially those in the Midwest, far away from Eastern industrialists. In 1902, Iowaâs governor Albert Cummins roiled his fellow Republicans when he used the state party platform to popularize the idea that tariffs should not protect monopolistic trusts.
President Teddy Roosevelt sensed the populist momentum building for tariff reform, but lacked a passion for it, calling it an issue âof expediency and not moralityâ since âthere is nothing more intrinsically right or wrong in a 40 percent tariff than in a 60 percent one.â It was not worth testing the bounds of party unity. So he ducked it.
After 12 years of heavy tariffs weighing on the public, Taft concluded he didnât have the luxury of procrastination. Having a progressive ben t but a conservative soul, he sought to gently nudge his party toward âdownward revision.â
Taft began his presidency taking the tariff issue head-on and calling Congress into a special session, where a pitched battle awaited. The House and Senate were led by âOld Guardâ protectionist Republicans like Senator Aldrich, but the progressive âinsurgentâ Republican faction was tenacious and could potentially forge majority coalitions with congressional Democrats.
Taft angered the progressives from the start, rejecting an attempt to oust the conservative, high-handed House Speaker Joe Cannon. The insurgents âlacked votes and a plausible alternative,â noted Taft historian Lewis Gould, and Taft didnât see the point in alienating the legislative gatekeepers. So Taft let Cannon and his House ally Rep. Sereno Payne, along with Senator Aldrich, take the lead in drafting the tariff bill.
Leaning on corporate-friendly insiders led to tepid reform. The House b ill offered a mild overall reduction in tariffs, with certain items getting an increase, while in the Senate, Aldrich brazenly jacked up tariffs on a whopping 600 items.
Progressives were so livid, they didnât credit Taft once he did inject himself in the process and moved the needle to the left.
What progressives wanted most was a fundamental shift in revenue collection: replacing protectionist tariffs with an income tax. Taft was supportive in concept, but wary of legislation that the Supreme Court had previously ruled unconstitutional.
To bridge the party divide, Taft offered a bold compromise: a constitutional amendment allowing for an income tax, along with a statutory tax on corporate profits. Protectionist conservatives opposed the amendment, but thought it couldnât get ratified, and grudgingly accepted a corporate tax as the price to pay for mollifying the left. Progressives, also skeptical about the likelihood of ratification, thought the whole pack age was weak tea. But Taft got his way.
Then, to resolve tariff differences in the bills that cleared the House and Senate, Taft drew red lines and wheeled deals. He kept tariffs down for key goods such as oil, coal, lumber and, most controversially, cattle hides (to the dismay of Western ranchers). But, fatefully, he bowed to the notoriously powerful wool lobby and left it well protected.
The net result was a mild downward revision at best. In turn, Democratic opposition was nearly unanimous, and progressive Republicans balked. But the Republican majority was big enough to withstand defections. The Payne-Aldrich tariff narrowly passed Congress, 47-31 in the Senate (with 10 Republican ânoâ votes) and 195-183 in the House.
At that point, Taft still may have been able to hold the fractious Republican coalition together, if not for his ill-conceived victory lap.
Following a summer vacation, Taft went on a cross-country speaking tour. In Boston, he lauded Aldrichâs leadership, rankling progressives who blamed the senator for stifling bolder reform. Then in Wisconsin, he snubbed top insurgent Republican Sen. âFighting Bobâ La Follette. But the biggest gaffe was yet to come.
In populist Minnesota, hoping to provide cover to a conservative ally who had voted for Payne-Aldrich, Taft rigorously defended the compromise legislation in mind-numbing detail (if you ever thought Hillary Clintonâs speeches were too dry and wonky, you never saw Taft explain tariff schedules line-by-line). But while progressives wanted to hear Taft emphasize where he fell short and push for more reform, he instead declared, âthe Payne tariff bill is the best tariff bill that the Republican Party ever passedâ and so âwe ought to give the present bill a chance.â
Taftâs defiant praise made progressives âfighting mad,â said Cummins, the low-tariff Iowa Republican who had joined the Senate and opposed Payne-Aldrich. And the law was a bust with the broader public, in part because Taft couldnât, or wouldnât, take on Big Woolâ"keeping the price of clothing artificially high.
This created an opening for a comeback by Taftâs predecessor and political mentor. As noted by historian Doris Kearns Goodwin in âThe Bully Pulpit,â The New York Times immediately discerned the political import of Taftâs speech: âTheodore Rooseveltâs good fortune has not deserted him â¦ If he still cherishes an ambition to return to the White House, the part has been opened to him by President Taft.â
Privately, Roosevelt was supportive of Payne-Aldrich. But when he returned home from an African safari in 1910, he was soon taking the Timesâ cue and exploiting disenchantment with Taft. With progressives squarely in his corner, Roosevelt challenged Taft for the 1912 Republican nomination. Once denied by the conservative Old Guard at the Republican convention, Rooseveltâs loyalists stormed out of the Chicago âs Congress Hotel, walked to Orchestra Hall, launched the Progressive Party and nominated Roosevelt for president. The party had broken.
Why should that history unnerve Republicans today? Tariff policy once united Republicans â¦ until it didnât. The same may be true for tax policy today.
Then and now, different Republican factions want contradictory things. Certain proposals favor one set of businesses over another. The mix of revenue cuts and revenue raisers risks produces little immediate benefit for voters.
Republicans would certainly find themselves exposed if they head into the midterms having produced no significant legislation. But jamming a tax kludge through Congress may drive more wedges through the already strained and shrunken Republican coalition. Even if it doesnât lead to a full-blown, 1912-style schism, it could prompt some soft Republican voters to bail or at least stay home, and a party that barely won the presidency with a m inority of the popular vote canât afford to lose many of its voters.
Of course, there is value in passing policy for policyâs sake. Taft may have shattered his party and condemned himself to a single term. But his awkward compromise ultimately achieved what he set out to do. The 16th Amendment was ratified on his watch, permanently moving the federal government from relying on protective tariffs to progressive income taxation, allowing the country to arm itself for the first world war and paving the way for the modernization of the federal government.
Maybe this Republican Congress will enshrine a tax provision into law that future generations will point to with pride. Just donât assume it will be enough to keep the Grand Old Party whole.