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Did Liz Truss Kill Reaganomics?

Here in the United States, Republicans still fully intend to cut taxes. But they’ve largely stopped campaigning on it.

Prime Minister Liz Truss  resignation speech
Rob Pinney/Getty Images
Prime Minister Liz Truss delivered her resignation speech on October 20, at 10 Downing Street in London.

The resignation of Liz Truss as prime minister marks the end of an epoch in Anglo-American politics. For the first time in modern memory, a conservative leader has been made to resign because she cut taxes and didn’t show how she’d make up the difference in lost revenue. Dare we conclude that the 41-year reign of Reaganomics is over?

Before you say, “It’s more complicated than that,” please allow me to acknowledge that, yes, the United Kingdom is not the United States, and many particulars of the U.K. economy that I won’t get into here are very different. Indeed, you might argue that Truss’s main failure, and that of her Conservative Party, was not to recognize how different. The price exacted by financial markets on her government’s proposed 45 billion pounds ($50.24 billion) in unfunded tax cuts was much higher than would have occurred here, where global demand for U.S. bonds gives conservative politicians much greater latitude to misbehave. Danish Finance Minister Kristian Jensen said memorably at a 2017 Brexit conference, “There are two kinds of European nations. There are small nations, and there are countries that have not yet realized they are small nations.” He was referring, in the latter case, to the U.K.

Still, I note with interest that aspiring House speaker Kevin McCarthy’s “Commitment to America” manifesto, an anemic update to Newt Gingrich’s 1994 “Contract With America,” differs from its predecessor in one significant and largely unremarked way.* It does not call explicitly for a tax cut. The word “tax” appears precisely once in the document, in a vague pledge to enact “pro-growth tax and deregulatory policies” that makes the party of Ronald Reagan sound like a mid-1990s New Democrat.

The 1994 Contract, by contrast, promised a capital-gains tax cut and pledged to require a three-fifths majority in the House and the Senate to raise taxes. Gingrich actually delivered on the former in 1997, reducing the top capital gains rate from 28 percent to 20 percent. McCarthy’s Commitment promises instead to reduce … the price of gasoline. Barring the imposition of wage and price controls, Congress has absolutely no power to do so.

Tax cuts became the idée fixe of conservatism in 1980, when candidate Reagan made them the centerpiece of his presidential campaign. Grover Norquist, who would later terrorize Republican candidates with his no-tax-raises pledge, was still just a kid in business school. Reagan hadn’t run on an anti-tax platform in 1976, when he challenged sitting President Gerald Ford from the right in the GOP primary. But inflation was pushing property taxes so high that a tax revolt had begun, starting in 1978 in Reagan’s home state of California and spreading eastward, and House Republican Jack Kemp of New York persuaded Reagan to join it. Reagan’s pledge to cut taxes without commensurate cuts in spending was sufficiently novel that Robert Kaiser, writing in June 1980 in The Washington Post, called it “unconventional” and even “radical.”

The Kaiser piece makes fascinating reading 42 years later. He was writing in an economic moment somewhat like our own, only much worse. Inflation today is 8.2 percent; in June 1980 it was 14.3 percent. Kaiser noted that many of Reagan’s fellow Republicans, including primary candidate George H.W. Bush, thought it irresponsible to propose a tax cut at a time when inflation was raging out of control. Bush said Reagan’s plan threatened to push inflation up to 30 percent! Kaiser quoted unnamed Reagan advisers conceding there was some danger that incumbent President Jimmy Carter could persuade voters that Reagan’s tax cut was “an elaborate—and fraudulent—promise of a free lunch.” But Reagan plowed ahead. Here’s what the Gipper said in one of his campaign ads, quoted by Kaiser in a tone of mild incredulity:

High tax rates don’t lower prices, they raise them. In the 1970s taxes grew faster than any other item in the household budget, including the price of energy. High tax rates discourage work and production. They add to the cost of living. If we make a deep cut in everyone’s tax rates, we’ll have lower prices, an increase in production, and a lot more peace of mind.

This was complete and utter bullshit. But it was about to become prevailing GOP gospel. Henceforth, it would never be a bad time to cut taxes—even when inflation was in double digits. Reagan won the election, passed sweeping and inflationary tax cuts—then let Fed Chairman Paul Volcker clean up the mess by inducing what was, at that point, the absolute worst recession America had seen since the Great Depression. (I exclude from criticism Reagan’s move to index tax brackets for inflation, a sensible and pragmatic strategy to keep taxpayers from getting pushed into higher brackets.)

Every Republican presidential nominee after Reagan promised to cut taxes. Poppy Bush broke his “read my lips: no new taxes” promise and may have lost the election as a result. Congressional races became all about cutting taxes, and of course many still are—with the promises sometimes coming from Democrats. But at the national level, the GOP has tiptoed away this year from the tax-cut message.

I’m not sure exactly why. I’d like to think it’s because House GOP leaders recognize that cutting taxes will increase inflation—that Reagan was wrong to think otherwise. But this is Kevin McCarthy we’re talking about, not Ezra Klein. It would make sense that Truss’s belly-flop on taxes scared McCarthy, but the timing doesn’t work: Truss’s tax plan and McCarthy’s Commitment were both introduced on the same day, September 23. Perhaps the GOP’s bid to tighten its hold on the working class, outlined in a 2021 memo to McCarthy by Representative Jim Banks, an Indiana Republican, influenced the decision; it’s hard to bash Democrats for “economic elitism” while simultaneously promising tax cuts for the rich. Perhaps McCarthy feels restrained by the strong likelihood that, even if Republicans regain both the House and the Senate, Biden will veto any tax cut the GOP sends his way (barring a trade to bring back the expanded child tax credit). It’s not great politics to promise something you know you won’t deliver.

But this doesn’t mean the GOP is eschewing tax cuts as a policy matter. They may not be talking about it much, but congressional Republicans fully intend to try to cut taxes, or at least to extend existing tax cuts, even knowing Biden won’t sign such legislation. After all, they still have a moneyed constituency to serve. Representative Adrian Smith, Republican of Nebraska, who would be Ways and Means chairman if Republicans retook the House, told C-SPAN in September that his first order of business would be to extend the personal income tax cuts in the 2017 Trump package, which are due to expire in 2025. Without any action from Congress, the top rate will revert automatically to 39.6 percent, up from the current 37 percent. As The Washington Post reported this week, McCarthy has talked about trying to extend other features of the Trump tax bill, including extending some cuts for business. “It’ll be a battle royale in Washington over the next year over which of Trump’s tax cuts get extended,” Stephen Moore, an economic adviser to Trump and key congressional Republicans, told the Post. “This will be a central, driving theme of the Republican Congress—making those tax cuts permanent.”

So let’s be clear: Tax cuts haven’t stopped being the idée fixe of the GOP. But political winds have shifted sufficiently that campaigning on tax cuts no longer seems the done thing. I wonder how long it will last. Longer, anyway, than Truss’s reign—and perhaps even that head of lettuce.

* A previous version of this article misstated McCarthy’s and Gingrich’s titles.