Why Grover Norquist's Tax Pledge Works

Grover Norquist has become Public Enemy Number 1 by insisting lawmakers keep their promises to voters, in the form of the Tax Pledge. Many believe this is blocking the "reasonable" compromises needed to avert the dreaded fiscal cliff. However, Norquist's organization has long promoted less-distorting tax policies.

Fred Smith
12/06/2012 @ 9:52AM
Forbes

Listening to the media these days, it seems Grover Norquist is Public Enemy No. 1. His insistence lawmakers keep their promises to voters—in the form of the Tax Pledge—is blocking the “reasonable” compromises needed to avert the dreaded fiscal cliff.

The media refrain is consistent: We need a “balanced” approach that includes not just spending cuts – or, at least, reductions of the rate at which government spending increases – but also “revenue enhancements,” i.e. taxes. The Pledge makes that hard, and therefore must go.

But, before we burn Grover and the pledges at the stake, let us consider what’s at the root of our fiscal difficulties. Nations run into deficit problems when economic growth stagnates and tax revenues fall. A primary cause of that stagnation is wealth transfers that stymie wealth creation. There is no shortage of entrepreneurial creativity in America, but our complex regulatory structure and tax code has favored wealth transfers at the expense of wealth creation in many ways.

Tax-favorable treatment and subsidies have artificially encouraged capital to flow into non-economic renewable energy ventures. More significantly, tax and regulatory arbitrage and a falling dollar encouraged excessive growth in the housing market, which inflated the bubble that, when it burst, led to a financial crisis.

Grover Norquist’s organization, Americans for Tax Reform, has long promoted less-distorting tax policies. This is much needed. Though taxation surely slows economic growth and wealth creation, so also do government spending and regulations.

Spending shifts capital from those who risk investing in wealth-creating enterprises to bureaucracies that allocate it in ways that reward special interests. Note primary spending comes not from discretionary spending, not even from the military, but from demographically unsustainable entitlement promises, such as retirement and health benefits, that have piled up over several decades.

Borrowing raises the rates private parties must pay to acquire capital for growth, and the Fed’s policy of low interest rates discourages savings and thus lowers the availability of entrepreneurial capital.

Regulations—and the massive uncertainties that their vagueness creates—raise the risk of innovative investments.

ATR, via the Tax Pledge, has placed a large STOP sign in the path of tax increases. Now we need to place similar barriers before these other obstacles to wealth creation.

True, the Pledge isn’t perfect. It doesn’t address spending. And what if the $10 in spending cuts for every $1 in tax increases deal mentioned in the Republican primaries were actually offered in some ironclad form?

Yet, absent the Pledge, there would be little consideration of a “balanced” discussion of how to address America’s true fiscal challenges. Just as ATR has focused on taxes, others need to take similar approaches into these other areas of economic distortion. The Pledge offers some useful lessons for those efforts.

Norquist’s genius has been to recognize politics can be disciplined only by qualitative rules, such as the “No Tax Increase” pledge. Bureaucrats and politicians have proved far too creative at gaming quantitative disciplinary rules. In so doing, Americans are beginning to rethink the need for the qualitative restraints the Founders saw as far superior to the “parchment barriers” proposed by so many centrists today. Thanks to Grover, there at least is discipline on tax increases.

The question of the size of government has taken on new importance in light of the recent election results. Nothing really changed—Barack Obama remained president, the Democrats held the Senate without a filibuster-proof majority and Republicans continue to control the House. But conventional wisdom now holds that Americans demand compromise.

We are constantly reminded President Obama’s victory is a victory for his belief that “the rich” should “pay a little more.” The pressure is on a group—House Republicans—not known for an ability to withstand it.

This is the value of the Pledge. Anybody can oppose taxes on the stump as an abstraction. It is now, when increasing taxes is touted as the only possible solution, that the Pledge proves its worth.

It reminds fiscally conservative voters why they supported the candidates they voted for. It reminds their representatives in Congress of the promise they made to not add to their constituents’ tax burden. And it provides a rare clear view of which politicians can be trusted to keep their word. America, despite the massive growth in the burdens imposed by government, remains that shining entrepreneurial society on the hill. We need no further stimulus, no creative accounting games.

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