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Payroll Taxes and a Two-Santa Theory

Thursday, 22 Dec 2011 | 4:29 PM ET
US Capitol Building with cash
US Capitol Building with cash

It’s almost an unbelievable development.

The Obama White House and the Democrat-controlled Senate are trying to extend the payroll tax cut and, until early Thursday evening, they found themselves in combat at every corner with the House Republicans.

How on earth did the Republicans manage to get themselves into the situation where they were fighting tax cuts while Obama was advocating them? Isn’t cutting taxes one of the core Republican principles?

Those are good questions. For two generations, the GOP has indeed been the tax-cut party, while the Democrats were the spending party. This was a very useful arrangement for the economy. The alternative was for the Republicans to be the spending cut party and the Democrats to be the tax-hike party — which is a recipe for the government to destroy wealth and economic productivity.

It wasn’t always so. In 1976, an editorial writer for the Wall Street Journal named Jude Wanniski wrote a profoundly influential article in the National Observer (which was the paper published by Dow Jones on Friday night, when the presses would be unproductively idle between printing the Wall Street Journal and Barron’s.) The article was titled “Taxes and the Two-Santa Theory.” It argued that what ailed the economy was “the failure of the Republican Party to play Santa Claus.”

Wanniski explained:

Simply stated, the Two Santa Claus Theory is this: For the U.S. economy to be healthy and growing, there must be a division of labor between Democrats and Republicans; each must be a different kind of Santa Claus. The Democrats, the party of income redistribution, are best suited for the role of Spending Santa Claus. The Republicans, traditionally the party of income growth, should be the Santa Claus of Tax Reduction. It has been the failure of the GOP to stick to this traditional role that has caused much of the nation’s economic misery.

Only the shrewdness of the Democrats, who have kindly agreed to play both Santa Clauses during critical periods, has saved the nation from even greater misery.

Somehow we’ve come full circle. The age of austerity apparently means that the Republicans have given up their role as Tax-Cut Santa, which is terrible not just for the Republicans but for the economy. We’re deep in an economic slump and Americans are severely overtaxed.

Let’s hope jingle bells start ringing in the ears of Republicans really soon, or else another kind of bell will toll for the GOP and the economy in short order.

You can read the entire Wanniski essay here.

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