The Shutdown and a Tea Party Tax Paradigm Shift: Guest Post by Marco Garofalo

One of the many benefits of hosting a tax policy colloquium is that the students become deeply engaged in grappling with tax policy principles through contemporary scholarship, and they apply these ideas to the world in which they find themselves. After our recent presentations by Reuven Avi-Yonah on the shifting pressures of globalization on the tax base, by Clifton Fleming on the politics of tax expenditure analysis, and by Lyne LaTulippe on the topic of tax competition, in which she introduced us to work by the political scientist Mark Blyth, one of my students came back with the following analysis of tax politics in the US, and he agreed to share it here.

Government Shutdown and a Tea Party-Induced Tax Policy Paradigm Shift in the United States

A paradigm shift in tax policy may be unfolding in the United States, as the Tea Party positions itself differently than either the Democrats or the Republicans when it comes to important aspects of tax policy processes and practices.  In a recent article, "Paradigms and Paradox: The Politics of Economic Ideas in Two Moments of Crisis," Mark Blyth investigated why we did not see a paradigm shift in economic policy after the financial crisis of 2008. He argues that paradigm shifts are usually:

1. triggered by failures in the current paradigm; 
2. accompanied by a new paradigm that is waiting in the wings to replace the current one; and 
3. driven by a change in who can speak authoritatively on the subject.

He concluded that “it is politics, not economics, and it is authority, not facts, that matter for both paradigm maintenance and change.” Consequently, he argues that we did not see a paradigm shift after the financial crisis for a few reasons. First, even though there was a failure of the current paradigm, there was no challenger waiting to replace it. To illustrate his point, Blyth suggests that it was inconceivable that the Washington Consensus would be replaced by the Beijing Consensus, “so complete was its initial victory.” Second, the sudden policy failure did not result in a change of who speaks authoritatively on the subject, as protagonists did not change (individuals in the US Treasury, the ECB, and the IMF all retained their authority) and thus their solutions did not either. Blyth calls this ‘disciplinary incentive’; in other words, “too many careers and institutions are at stake!” Thus the financial crisis did not spur a paradigm shift.

But consider the Tea Party and its crusade. Since 2009, the Tea Party has been an unavoidable presence in US politics. While the Tea Party story has many permutations, causes, and manifestations, only the current government shutdown is important for the purposes of the current discussion. The current shutdown is not about Republicans versus Democrats; it is about the Tea Party versus Republicans. The Patient Protection and Affordable Care Act passed in Congress, was upheld by the Supreme Court of the United States, and its funding was not seriously contested by the Republican Party. This is an artificial crisis, a main architect of which appears to be Jim DeMint, former US Senator and current President of the Heritage Foundation.  If non-Tea Party GOP members do not want to play along, the implicit threat, according to Joshua Green of Bloomberg Businessweek, is that the Tea Party will turn on them, such as by launching “attack ads calling [Republican Senator Mitch] McConnell a ‘turncoat’ who ‘surrendered to Barack Obama’ in the healthcare fight."  So far, the Tea Party is pulling off this political coup: the government is shut down and positions are becoming entrenched.

Now consider this political impasse as a paradigm shift. First, we have a failure in the current paradigm (even though it is artificial). Joshua Green argues that “What’s causing the malfunction is a battle within the GOP.”  Second, we have a paradigm waiting in the wings to replace the current one. In fact, the Tea Party is not so much waiting to replace the Republicans as forcing that to happen. Third, the loci of authority in the Republican Party are shifting, either to Tea Party members or to the remaining GOP members who agree to change their tune. Hence we may see a paradigm shift, in which the Tea Party becomes the dominant faction in the Republican Party, resulting in a recalibration of the Democrat-Republican relationship.

Such a paradigm shift would have serious implications for tax policy. At least two would arise immediately, in the areas of tax expenditure analysis and tax consultations. First, tax expenditure analysis may begin to play a greater role. While the Republicans and Democrats function largely by dressing government spending as tax credits and deductions, the Tea Party is having none of that. The prime example would be the current crisis. The current government shutdown is itself a tax issue: the Patient Protection and Affordable Care Act, SCOTUS cogently reminds us, is a piece of tax policy. If the Tea Party does become the dominant Republican faction, then tax expenditure analysis may take center stage as a tool to sniff out government spending in all of its forms.

Second, the structure and content of tax consultations could change. Professor LaTulippe argues that international tax policy is beholden to a discourse of competitiveness (draft forthcoming). While part of the competitiveness discourse is about low rates, which the Tea Party presumably likes, part of the discourse is about tax expenditures, which the Tea Party would not like. Currently, tax consultations perpetuate this discourse by giving short time frames for the private sector to contribute to proposed tax reforms, with the result that a certain class of participants (accountants and lawyers) is greatly advantaged in giving feedback and achieving client-favored tax policy results. With the Tea Party paradigm, that policy loop could be disrupted, as this recent article suggests.

A paradigm shift in US politics is not certain. Any number of things could happen, including the Republican Party standing up to and beating the Tea Party. If that were to happen, then tax policy commentators should be concerned about the issues described above. Maybe once the dust settles we will meet the new boss, same as the old boss. But the current government shutdown (and impending sovereign debt default deadline) exhibits signs of a paradigm shift.  Something fundamental does seem to be changing on the small government side of political discourse. As such, we should stay tuned to the implications for tax policy.