Arguments about national tax policy have taken center stage in U.S. politics in recent times, creating acute dilemmas for Democrats. With Republicans locked into antitax agendas for some time, Democrats have recently begun to push back, arguing for maintaining or even increasing taxes on the very wealthy in the name of deficit reduction and the need to sustain funding for public programs. But the Democratic Party as a whole has not been able to find a consistent voice on tax issues. It experienced key defections when large, upward-tilting tax cuts were enacted under President George W. Bush, and the Democratic Party could not control the agenda on debates over continuing those tax cuts even when it enjoyed unified control in Washington, DC, in 2009 and 2010. To explain these cleavages among Democrats, we examine growing pressures from small business owners, a key antitax constituency. We show that organizations claiming to speak for small business have become more active in tax politics in recent decades, and we track the ways in which constituency pressures have been enhanced by feedbacks from federal tax rules that encourage individuals to pass high incomes through legal preferences for the self-employed. Comparing debates over the inception and renewal of the Bush tax cuts, we show how small business organizations and constituencies have divided Democrats on tax issues. Our findings pinpoint the mechanisms that have propelled tax resistance in contemporary U.S. politics, and our analysis contributes to theoretical understandings of the ways in which political parties are influenced by policy feedbacks and by coalitions of policy-driven organized economic interests.
1. On the Bush tax cuts as a critical juncture for tax politics, see Bartels, Larry, “Homer Gets a Tax Cut: Inequality and Public Policy in the American Mind,” Perspectives on Politics 3 (2005): 15–31 ; Hacker, Jacob S. and Pierson, Paul, “Abandoning the Middle: The Bush Tax Cuts and the Limits of Democratic Control,” Perspectives on Politics 3 (2005): 33–53 .
2. See, e.g., Immergut, Ellen M., “Institutions, Veto Points, and Policy Results: A Comparative Analysis of Health Care,” Journal of Public Policy 10 (1990): 391–416 ; Tsebelis, George, “Decision Making in Political Systems: Veto Players in Presidentialism, Parliamentarianism, Multicamerialism and Multipartyism,” British Journal of Political Science 25 (1995).
3. For a similar concept of “durable” policy coalitions in fiscal policy, see also Hacker, Jacob S. and Pierson, Paul, “Presidents and the Political Economy: The Coalitional Foundations of Presidential Power,” Presidential Studies Quarterly 42 (2012): 101–31.
4. Steven Teles, The Rise of the Conservative Legal Movement: The Battle for Control of the Law (Princeton, NJ: Princeton University Press, 2008).
5. See, e.g., Moe, Terry M., “Political Institutions: The Neglected Side of the Story,” Journal of Law, Economics, & Organization 6 (1990): 213–53; Kathleen Thelen, How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan (New York: Cambridge University Press, 2004); Theda Skocpol, Protecting Soldiers and Mothers: The Political Origins of Social Policy in United States (Cambridge, MA: Belknap Press, 1992).
6. See, e.g., Andrea Louise Campbell, How Policies Make Citizens: Senior Political Activism and the American Welfare State (Princeton, NJ: Princeton University Press, 2003); Mettler, Suzanne and Soss, Joe, “The Consequences of Public Policy for Democratic Citizenship: Bridging Policy Studies and Mass Politics,” Perspectives on Politics 2 (2004): 55–73 .
7. For the conventional perspective, see, e.g., Anthony Downs, An Economic Theory of Democracy (New York: Harper, 1957). For the newer perspective, see, e.g., Bawn, Kathleen, Cohen, Martin, Karol, David, Masket, Seth, Noel, Hans, and Zaller, John, “A Theory of Political Parties: Groups, Policy Demands and Nominations in American Politics,” Perspectives on Politics 103 (2012): 571–597 ; David Karol, Party Position Change in American Politics: Coalition Management (New York: Cambridge University Press, 2010); Hacker, Jacob S. and Pierson, Paul, “After the “Master Theory”: Downs, Schattschneider, and the Rebirth of Policy-Focused Analysis,” Perspectives on Politics 12 (2014): 643–62.
8. On the complexity of the American income tax, see, e.g., Michael Graetz, The Decline (and Fall?) of the Income Tax (New York: WW Norton, 1997). On Americans' confusion with tax policy, and its implications for policy preferences, see, e.g., Bartels, “Homer Gets a Tax Cut: Inequality and Public Policy in the American Mind.”
9. Prasad, Monica, “The Popular Origins of Neoliberalism in the Reagan Tax Cut of 1981,” Journal of Policy History 24 (2012): 351–83.
10. On the tax revolt, see, e.g., Robert Kuttner, Revolt of the Haves: Tax Rebellions and Hard Times (New York: Simon & Schuster, 1980); David O. Sears and Jack Citrin, Tax Revolt: Something for Nothing in California (Cambridge, MA: Harvard University Press, 1985). On the interplay between the state-level tax revolts and federal tax politics, see Isaac Martin, The Permanent Tax Revolt: How the Property Tax Transformed American Politics (Palo Alto, CA: Stanford University Press, 2008).
11. Karol, Party Position Change in American Politics.
12. See, e.g., Jacob S. Hacker and Paul Pierson, Off Center: The Republican Revolution and the Erosion of American Democracy (New Haven, CT: Yale University Press, 2006); Jacob S. Hacker and Paul Pierson, Winner-Take-All Politics: How Washington Made the Rich Richer—and Turned Its Back on the Middle Class (New York: Simon & Schuster, 2010).
13. On feedback effects, see Pierson, Paul, “Review: When Effect Becomes Cause: Policy Feedback and Political Change,” World Politics 45 (1993): 595–628 ; Skocpol, Protecting Soldiers and Mothers. We say “small” despite the fact that many of these entities would not fit the traditional conception of small business; we explore this discrepancy in more detail in the subsequent sections.
14. Hacker and Pierson, “Presidents and the Political Economy”; Hacker and Pierson, Winner-Take-All Politics; Hacker and Pierson, “Abandoning the Middle.”
15. Isaac Martin, Rich People's Movements: Grassroots Campaigns to Untax the One Percent (New York: Oxford University Press, 2013).
16. See, e.g., Elisabeth Bumiller, “Bush Pushes Tax Cut as Small-Business Aid,” New York Times, January 23, 2003: A20.
17. See, e.g., Ryan J. Donmoyer, “Would Ending Bush's Tax Cuts Hurt Small Business?” Bloomberg Business Week, September 23, 2010.; Jill Jackson, “Moderate House Democrats Push for Vote on Extending All Bush Tax Cuts,” CBS News (2010).
18. Turner Catledges, “Small Companies Fight Profit Tax; King Has New Plan,” New York Times, May 2, 1936: 1.
19. Note that the archive does not have records for Barry Goldwater's campaign.
20. Dwight Eisenhower, October 21, 1952, Stump Speech in Nashua, New Hampshire [Annenberg-Pew Archive of Presidential Campaign Discourse, University of Pennsylvania, c2000].
21. Bob Dole, September 23, 1996, Stump Speech in Springfield, Virginia [Annenberg-Pew Archive of Presidential Campaign Discourse, University of Pennsylvania, c2000].
22. Bill Clinton, September 19, 1996, Stump Speech in Longview, Washington. [Annenberg-Pew Archive of Presidential Campaign Discourse, University of Pennsylvania, c2000].
23. See, respectively, Senate Committee on the Budget, June 4, 2013, “Senator Patty Murray Holds A Hearing on Fiscal and Economic Effects of Austerity,” Washington, DC; Subcommittee on Select Revenue Measures, House Ways and Means Committee, May 15, 2013, “Small Business and Pass-Through Entity Tax Reform,” Washington, DC; Subcommittee on Oversight, House Ways and Means Committee, April 25, 2013, “Rep. Charles Boustany Jr. Holds a Hearing on IRS Operations and 2013 Tax Return Filing Season,” Washington, DC.
24. Jonathan Weisman, “Lonely Bipartisan Push to Overhaul Tax Code Finally Gets Noticed,” New York Times, July 30, 2013: A11.
25. We can also test the increasing likelihood of self-employed individuals to report that their federal income taxes are too high more formally by regressing a dummy variable indicating that a GSS respondent indicated their federal income taxes were too high on a dummy variable for self-employment, a linear time trend, and the interaction between the dummy for self-employment and the linear time trend. The interaction term is positive and highly statistically significant in both ordinary least squares (OLS) and logit specifications, indicating that self-employment has become a better predictor of whether a respondent views their federal income taxes as being too high (p = 0.02 for the OLS specification).
26. Martin, Cathie Jo, “Business and the New Economic Activism,” Polity 27 (1994): 49–76 ; David Vogel, Fluctuating Fortunes: The Political Power of Business in American Politics (Washington, DC: Beard Books, 1989); Hacker, Jacob S. and Pierson, Paul, “Winner-Take-All Politics: Public Policy, Political Organization, and the Precipitous Rise of Top Incomes in the United States,” Politics and Society 38 (2010): 152–204 .
27. David Vogel, Kindred Strangers: The Uneasy Relationship between Politics and Business in America (Princeton, NJ: Princeton University Press, 1996), 5–6.
28. Hacker and Pierson, Winner-Take-All Politics, 119. See also the following quote from a Business Roundtable report: “One of the relatively recent phenomena of government-business relations has been the organization of the nation's small business interests as a major public policy participant.… Two major national groups have become the primary representatives of small business: the National Federation of Independent Business (NFIB) and the National Small Business Association (NSB). The NFIB has grown from fewer than 300 member companies in 1971 to some 600,000 in 1980. With a substantial lobbying organization in Washington, the NFIB plans to expand its state lobbying operations from twenty-four to all fifty states.… Perhaps the foremost reason for the rising political influence of small business is that the roughly 14 million operators of small enterprises are everywhere and that such operators are constituents of every officeholder.… A less obvious factor is that many members of Congress have owned or managed small businesses themselves.” Francis W. Steckmest, Corporate Performance: The Key to Public Trust (New York: McGraw-Hill, 1982).
29. See, e.g., Theda Skocpol, Diminished Democracy: From Membership to Management in American Civic Life (Norman, OK: University of Oklahoma Press, 2004).
30. Vogel, Fluctuating Fortunes, 154–56.
31. Quoted in Vogel, Fluctuating Fortunes, 156.
32. Author interview with Bloomberg reporter, February 8, 2011. For a different but related perspective, see also Martin, Cathie Jo, “Business Influence and State Power: The Case of U.S. Corporate Tax Policy,” Politics & Society 17 (1989): 189–223 .
33. Rojas, Warren, “Norquist Sees Antitax Crusade as Cornerstone of GOP Domination,” Tax Notes 307 (2004): 307–17; Jeffrey H. Birnbaum, “A Quiet Revolution in Business Lobbying: Chamber of Commerce Helps Bush Agenda,” Washington Post, February 5, 2005: A1. Note that Cathie Jo Martin also attributes this new “class consciousness” among business to Democratic mobilization of business under the Kennedy and Johnson administrations; see Martin, “Business Influence and State Power.”
34. Young, McGee, “The Political Roots of Small Business Identity,” Polity 40 (2008): 436–63.
35. CBO, Taxing Businesses Through the Individual Income Tax (Washington, DC: Congressional Budget Office, 2012).
36. Chye-Ching Huang and Chuck Marr, Allowing High-Income Bush Tax Cuts to Expire Would Affect Few Small Businesses (Washington, DC: Center on Budget and Policy Priorities, 2012).
37. Chye-Ching Huang and James Horney, Big Misconceptions About Small Businesses and Taxes (Washington, DC: Center on Budget and Policy Priorities, 2009); Huang and Marr, Allowing High-Income Bush Tax Cuts to Expire; Nicholas Johnson and Michael Mazerov, Proposed Kansas Tax Break for “Pass-Through” Profits Is Poorly Targeted and Will Not Create Jobs (Washington, DC: Center on Budget and Policy Priorities, 2012).
38. Huang and Horney, Big Misconceptions About Small Businesses and Taxes; Huang and Marr, Allowing High-Income Bush Tax Cuts to Expire.
39. Before 1993, the bivariate relationship between tax opinions among the self-employed and the difference in top rates had an R-squared of 0.27; in 1993 and after, the R-squared was 0.63.
40. “Remarks by the President During Meeting with Small Business Owners,” Office of the Press Secretary, the White House, March 16, 2001.
41. Charles Krauthammer, “Return of the Real Obama,” Washington Post, January 3, 2013.
42. NFIB, Taxes and Spending: Small Business Owner Opinions (Washington, DC: NFIB, 2013); NFIB, Don't Raise Taxes on Small Businesses (Washington, DC: NFIB, 2010).
43. Center on Budget and Policy Priorities, Chart Book: The Bush Tax Cuts (Washington, DC: Center on Budget and Policy Priorities, 2012).
44. Center on Budget and Policy Priorities, Chart Book.
45. “Tax-Cut Fever in the House,” New York Times, March 8, 2001; Jonathan Weisman, “Bush's tax-cut hardball seems to have paid off,” USA Today, May 28, 2001.
46. We focus on the House, rather than the Senate, because there is more variation across districts than across states in the prevalence of small business incorporation, one of our two key explanatory variables.
47. These data are from the decennial census (2000), extracted from the National Historical Geographic Information System. Our results are similar with agricultural small businesses. For House Democrats, the mean incorporated self-employment rate was 2.7 percent (SD: 1 percent). For House Republicans, the mean incorporated self-employment rate was 3.3 percent (SD: 1 percent).
48. We use data from the Center for Responsive Politics. For House Democrats, the mean NFIB donation was $157 (SD: $1,167). For House Republicans, the mean NFIB donation was $2,076 (SD: $2,682).
49. See, canonically, Ansolabehere, Stephen, de Figueiredo, John M., and Snyder, James M., “Why Is There so Little Money in U.S. Politics?” Journal of Economic Perspectives 17 (2003): 105–30. On the stages when lobbying occurs, see Hall, Richard L. and Wayman, Frank W., “Moneyed Interests and the Mobilization of Bias in Congressional Committees,” American Political Science Review 84 (1990): 797–820 .
50. Royce Carroll, Jeff Lewis, James Lo, Nolan McCarty, Keith Poole, and Howard Rosenthal, “DW-NOMINATE Scores With Bootstrapped Standard Errors” (2013), http://voteview.com/.
51. See, e.g., Ansolabehere, Stephen, Snyder, James M., and Stewart, Charles III, “Candidate Positioning in U.S. House Elections,” American Journal of Political Science 45 (2001): 17–34 . See also Rodden, Jonathan and Warshaw, Christopher, “How Should We Measure District-Level Public Opinion on Individual Issues?” Journal of Politics 74 (2011): 203–19.
52. Our findings for NFIB donations and incorporated self-employment remain identical if we exclude the other control variables. Another concern is that these two variables are correlated with one another. We find no evidence that this is the case. The statistical significance of the bivariate correlation for Democrats is p = 0.90 and p = 0.59 for Republicans.
53. In an identical analysis of the final votes on the passage of the 2003 Bush tax cuts in the House of Representatives, NFIB donations were a predictor of Democratic stances, but not Republican stances, and the prevalence of incorporated self-employment had a larger effect on Democrats than Republicans.
54. For instance, neither NFIB donations nor the self-employed incorporation rate could predict House Democrats' stances on the 2001 passage of the No Child Left Behind Act, which substantially reformed elementary and secondary education (six House Democrats voted against the bill, and seven abstained).
55. Out of ten similarly phrased national polls (extracted from the Roper Center for Public Opinion archive) that asked respondents to choose between three options for the Bush tax cuts—extend all cuts, extend cuts for income below $250,000, and let all cuts expire—the original Obama White House position (letting the cuts expire for high-income households) garnered a plurality of support in six polls. These polls include Gallup/USA Today (12/10/10–12/12/10), Pew Research Center (12/1/10–12/5/10, 7/22/10–7/25/10), CBS News (11/29/10–12/1/10), AP/CNBC/Gfk (11/18/10–11/22/10), CNN/ORC (11/10/10–11/14/10), AP/Gfk (11/3/10–11/8/10, 9/8/10–9/13/10, 8/11/10–8/16/10), and Allstate/National Journal (8/27/10–8/30/10).
56. See, e.g., Congressional Budget Office, Policies for Increasing Economic Growth and Employment in 2010 and 2011 (Washington, DC: Congressional Budget Office, 2010); Chuck Marr and Gillian Brunet, Extension of High Income Tax Cuts Would Benefit Few Small Businesses: Jobs Tax Cut Credit Would Be Better (Washington, DC: Center on Budget and Policy Priorities, 2010).
57. These letters were released by Representative Glenn Nye (on September 15, 2010) and Representative John Adler (on September 24, 2010).
58. Donation data are from the Center for Responsive Politics; self-employment data are from the American Community Survey for 2009. For House Democrats, the mean incorporated self-employment rate was 3.2 percent (SD: 1.3 percent), and the mean NFIB donation was $178 (SD: $1,136).
59. Specifically, we measured whether the Cook political report rated their race as “competitive” or a “toss-up” in October 2010. For assessments at the time, see, e.g., Kim Dixon, “Analysis: Obama has tenuous grip on Democrats over taxes,” Reuters, September 9, 2010.
60. We used 2010 data from Citizens for Tax Justice.
61. Ray Gustini, “Democrats Break With Obama on Bush Tax Cuts” The Atlantic Wire, September 10, 2010. See also Greg Sargent, “Plum Line: Dear Dems: You Can Win the Argument Over Bush Tax Cuts,” Washington Post, September 10, 2010.
62. Our results for NFIB donations and for incorporated self-employment remain identical excluding the control variables. There is no correlation between NFIB donations and incorporated self-employment in this year (the bivariate correlation is significant at p = 0.44).
63. Interview with staffer from the office of Representative Glenn Nye, October 17, 2010.
64. Jonathan Cohen, “Citizen Cohen: Why Some Democrats are Fraidy Cats on Taxes,” The New Republic, September 15, 2010.
65. For a careful historical account of the changes in the Republican Party, see Geoffrey Kabaservice, Rule and Ruin: The Downfall of Moderation and the Destruction of the Republican Party, From Eisenhower to the Tea Party (New York: Oxford University Press, 2012).
66. Martin, The Permanent Tax Revolt; Martin, Rich People's Movements.
67. Gene Steuerle, Contemporary US Tax Policy (Washington, DC: The Urban Institute Press, 2008); Paul Pierson, “The Deficit and the Politics of Domestic Reform,” in The Social Divide, ed. Margaret Weir (Washington, DC: The Brookings Institution Press, 1998), 126–80.
68. Benjamin C. Waterhouse, Lobbying America: The Politics of Business from Nixon to NAFTA (Princeton, NJ: Princeton University Press, 2013); Mark S. Mizruchi, The Fracturing of the American Corporate Elite (Cambridge, MA: Harvard University Press, 2013); Kim Phillips-Fein, Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan (New York: WW Norton, 2009); Cathie Jo Martin, Stuck in Neutral: Business and the Politics of Human Capital Investment Policy (Princeton, NJ: Princeton University Press, 2000).
We are grateful for the helpful advice and feedback we received from previous presentations of this project at the History, Institutions, and Politics Workshop and the Tax Politics and Policy Workshop at Harvard, as well as the 2013 Midwest Political Science Association Conference. Hertel-Fernandez acknowledges financial support from the National Science Foundation's Graduate Research Fellowship and from the Malcolm Wiener Center for Social Policy. All errors are our own.
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