On Tax Cuts, GOP Should Think like Business

Mythology in Washington holds that when it comes to economics, Republicans know best. The root of this myth is another myth, which goes like this: When it comes to business, especially small business, Republicans know best.

All of this doesn’t matter until you get to taxes, when the Republicans, buttressed by their mythological understanding of these things, believe they know best.

And what the Republicans believe they know best is that when you cut taxes, everything gets better: Government shrinks, business booms and tax revenues go up.

It’s not that there aren’t shards of truth here; it’s just that everything has to be in the right conjunction to get one or all of these benefits.

Business doesn’t go along with these myths but, like everyone else, it hates paying taxes, so by and large it endorses the Republican position.

The thing is, business believes in a more durable truth: price.

Price means revenue, and business, therefore, believes and practices aggressive pricing. When business needs to exceed the gap between cost and revenue, it increases the price. If the market refuses to pay the price, business exits that market or fails.

Sometimes, however, and increasingly in these hard times, business pulls a con. It lowers or maintains the price, but adds other charges to gain income. The airlines are doing this. The banks make as much or more on fees than they do on consumer loans. Catalog companies do it with “shipping and handling” fees.

Publishers have experimented more with price than most businesses, and their conclusion is to stay on the high side. If the market rejects your high-priced publication, so be it.

I’ve spent a lifetime studying pricing in publishing. All I’ve learned is this: Defend your price.

In London, Rupert Murdoch engaged his Times in a costly price war with Conrad Black’s Daily Telegraph. In the middle of fierce cost-cutting, Murdoch’s camp, with more resources, was triumphant.

Cheap papers were selling.

But when it was all over, the relative positions of the publications had not changed by much and millions of British pounds had been lost. The hope had been that the victor, Murdoch’s papers, would gain so many more readers that they could make up the circulation revenue losses with higher advertising rates. It didn’t work.

Taxes are different, the GOP has averred. Not really. If they’re too high, they will stifle business, choke enterprise and cause businesses to go offshore. Clearly, marginal rates that exceed some magic number (well south of 50 percent) would stifle business.

At one point after World War II, they reached 90 percent in Britain with disastrous results and a few comical ones. The titled, moneyed families fled to Kenya and Rhodesia and the show-business types took up residence in Switzerland. Actor David Niven and playwright Noel Coward were among these.

Now that the tax cuts enacted in the early days of the George W. Bush administration are about to expire, it may behoove us to examine these with a question: What would business do? Things looked pretty bright when these cuts were enacted with the prospect of years of surpluses. But that was before 9-11, two big wars and a recession.

Therefore, if you looked at the tax issue from a boardroom point of view, the unanimous decision would be to go for the revenue and review the result later. Boardroom-loving Republicans ought to know this.

In business, they laugh at people who believe that lower prices automatically will produce compensating revenue. The joke goes something like losing a little on everything and making up with volume.

Many years ago, I had lunch with George Will and Trent Lott. All three of us were speakers at the American Petroleum Institute’s annual meeting in Houston. At the time, Lott and Will agreed that we were an under-taxed country, given the demands on government.

Back then, Republicans thought like business people.