Vision of the Newly Anointed

Sometimes it feels like we’ve landed on a different economic planet. The traditional markers of conservative economic policy, such as free trade, limited government, and fiscal prudence, have been abandoned. In their place, we now suffer tariffs, tax gimmicks, price controls, distortive carve-outs, and economic populism that could easily be mistaken for a progressive campaign platform. 

This is the strange moment we find ourselves in. 

Republicans once championed open markets and neutral taxes, grounded in the belief that voluntary exchange and smaller government raise living standards. They were right, as these policies lifted many people out of poverty and made the United States a prosperous country, including for lower-income people. Leaving aside the trade war and protectionist drama, today’s republicans seem more interested in preserving some of Biden’s policies and securing new victories for Democrats than advancing what, I believe, most Republicans still see as their own values.  

Take the debate over the extension of the Trump tax cuts. We may be watching a complete unraveling of tax-policy coherence. In a recent blog post over at the Unseen and The Unsaid, Mercatus Center’s Jack Salmon detailed how the president’s campaign promises to exempt certain types of income from taxation (overtime, tips, Social Security) have now morphed into legislative proposals, and that’s not good news for the long-term tax reform agenda of free-market/conservative movement. These proposals are not tax reform. They are vote-buying carve-outs that would blow enormous holes in the tax base and undermine the very principles for which tax reformers have fought for over half a century. 

Salmon cites data from the American Action Forum, which estimates that exempting overtime pay from taxation would cost between $680 and $866 billion over ten years and fail to meaningfully increase work hours, just as a similar French policy failed in 2007 (as documented in a 2014 Journal of Labor Economics study). 

The proposal to exempt tip income? According to the Yale Budget Lab, it would cost $118 billion but could balloon to over $300 billion after accounting for behavioral responses. Worse still, it would violate horizontal equity: a cashier earning $30,000 would pay more federal income taxes than a waiter earning $50,000, simply because the waiter’s income is structured as tips. 

And then there’s the itch to exempt Social Security benefits from taxation. The Tax Foundation estimates that this move would, over the next decade, cost $1.19 trillion. That revenue currently helps fund the Social Security trust fund. Stripping it out would only hasten the program’s insolvency.  

These proposals are not tax reform. They are gimmicks. And collectively, as Salmon points out, they represent over $1 trillion in lost revenue, all to reward narrowly defined voting blocs at the expense of sound tax policy. 

Then there’s the increase of the State and Local Tax (SALT) deduction cap. The capping of the SALT to $10,000 in the original tax bill was one of the few pay-for provisions of the 2017 Tax Cuts and Jobs Act, but also one whose maintenance would improve the tax code. That cap is now under attack by Republicans themselves, especially those from high-tax states like New York, New Jersey, and California. According to a recent analysis by Joe Henchman at the National Taxpayers Union, raising the cap from $10,000 to $25,000 would deliver 78.2% of the benefits to blue states, with just 21.8% going to red states. New York, California, and New Jersey alone would receive over 53% of the total benefits. 

In other words, GOP lawmakers are fighting to subsidize high-tax blue states by repealing one of their party’s most effective structural reforms. It’s not just bad policy; it’s incoherent. Much of the same can be applied to the president’s tariffs on foreign movies declaration. It would shelter an industry that mostly dislikes anything conservative and whose problems today are largely the results of the idiotic policies of Gavin Newson and other California progressives. 

Indeed, much of Hollywood’s current woes are partially driven by California’s high taxes, rigid labor regulations and unions, and costly environmental mandates. From AB5’s assault on independent contractors to the state’s sky-high corporate and personal income tax rates, progressive policies have made producing films harder and more expensive in California. Add to that the state’s aggressive regulatory environment—covering everything from emissions standards to diversity mandates—and it’s no wonder studios increasingly film elsewhere. Tariffs won’t fix that; they’ll add more government distortion to an already overregulated industry. 

Meanwhile, the issue of Medicaid reform, including scaling back the Medicaid Obama and Biden policies, long a cornerstone of conservative fiscal and moral arguments, is being met with hostility not just from Democrats, but increasingly from the populist right. Brian Blase of the Paragon Health Institute – and a former Trump administration health economist – has been leading the charge to eliminate the provider tax loophole and restore Medicaid’s focus on the truly vulnerable. For this admirable effort, he’s been vilified by activists who claim to speak for working-class interests and the president’s agenda. 

But Blase’s work is backed by serious scholars. Paul Winfree, president of the Economic Policy Innovation Center and former budget policy director in the Trump White House, has detailed, both in his work and in work he has done with Blase, the incentives that drive Medicaid’s dysfunction. Under current law, states receive $9 in federal funding for every $1 they spend on healthy, working-age adults—but just $1.33 for every $1 spent on the disabled, elderly, and pregnant women. As Winfree writes, this perverse match rate is the reason why 700,000 disabled Americans are stuck on waiting lists for services. At the same time, states prioritize enrolling able-bodied adults, including illegal immigrants in states like California, to maximize federal payouts. This explains why 40 percent of the state’s population is on Medicaid.  

This isn't just a fiscal problem. It’s a moral one. As Rachel Bovard of the Conservative Partnership Institute put it recently, “Members of Congress arguing that there should be 'no cuts to Medicaid' are saying it’s fine to put pregnant women and disabled kids at the back of the line.” Medicaid’s current structure is inequitable, unsustainable, and deeply regressive. Reform is not an attack on the safety net. It’s a defense of its legitimacy against the Biden and Obama extension of the program that made it serve those who genuinely need it poorly. 

And yet, here we are. The recently released House plan to “cut” Medicaid spending is primarily a plan to slow down the growth of program’s spending. As the WSJ reports: 

The bill includes some of the changes Republicans have weighed for Medicaid, including work requirements and more frequent eligibility checks. But it doesn’t lower the minimum share the federal government contributes to Medicaid in each state, cap per-person federal spending in the program or other steps some spending hawks sought.

To add insult to injury, Republicans are also reportedly moving forward with a proposal that would continue some of the Biden administration's energy subsidies and policies from the ironically named Inflation Reduction Act (which did the opposite in fact) and pay for them by raising taxes on small business owners and other Americans still suffering higher prices from some of those same policies to pay for it.  

Republicans need to have their "man in the mirror" moment before it's too late, before the voters who sent them to Washington on their promise not to let TCJA expire and to eliminate the failed policies of the Biden era, no longer recognize them.  

We are in an upside-down moment, when Republicans are pushing policies that would have been rejected by Bill Clinton, let alone by Ronald Reagan. And the few of us still defending growth-oriented, rules-based policy are being called “RINOs” by people who seem to have no idea what conservatives and the Republican economic platform long stood for. 

With Republicans like this, who needs Democrats?  

Veronique de Rugy is the George Gibbs Chair in Political Economy and Senior Research Fellow at the Mercatus Center at George Mason University. She is also a nationally syndicated columnist and contributing editor to Civitas Outlook.