Bring Back Voodoo Economics: As a ruse to cut the deficit, Republicans gave away their best argument for tax cuts. Oops!
Bartlett, Bruce
Bring Back Voodoo Economics As a ruse to cut the deficit, Republicans gave away their best argument for tax cuts. Oops! BY BRUCE BARTLETT One reason the Bush administration's rationale for a tax...
...16 THE AMERICAN SPECTATOR ¦ March 2001 When Reagan won the White House the administration put Norman Ture and Craig Roberts in high positions in Treasury to force a change to dynamic scoring...
...It will be a tragedy if Republicans once again fail to institute dynamic scoring...
...Reforming the budget shops Businesses don't calculate the this way...
...In some cases, because rates were so high, rate cuts would actually increase revenues...
...Arthur Laffer's famous curve made this point graphically, showing a 100 percent tax rate collecting zero revenue...
...changes in economic behavior, they found that some tax cuts, such as cuts in the capital gains tax, would lose no revenue at all...
...Historically—that is, before computers— these calculations were done by accountants who simply multiplied the tax changes by the number of taxpayers affected and came up with a revenue figure...
...As a former Office of Management and Budget staffer, Treasury-Secretary Paul O'Neill may incline towards traditional estimating methods...
...When Republicans took control of both houses of Congress in 1994, they tried again...
...ld be with us for decades...
...It ought to be possible, finally, to bring the government's revenue estimating out of the Stone Age...
...At the other end of Pennsylvania Avenue, Bill Thomas (R-CA), new chairman of the House Ways and Means Committee, defeated a more senior member, Phil Crane (R-IL), who had promised to institute dynamic scoring at the JCT...
...But the method remained largely the same...
...Doing their own models incorporating estimates of effects of price changes will increase...
...Once in place, it will soon become clear that it produces more accurate projections, making it difficult for Democrats to reverse course if they re-take Congress...
...Static scoring incorporates a bias for tax increases and against tax cuts...
...They lacked the expertise, the technology, and the data bases to estimate such changes effectively...
...For almost twenty years supply-siders have been structurally prevented from making their case in the places that matter most, the Congressional and White House budgeting bureaucracies...
...But politics also played a role...
...But ultimately the administration backed down...
...Bush has said publicly that he believes tax cuts can sometimes raise revenue...
...Inside the Beltway, this argument was lost long ago...
...But now that the GOP has both houses and the White House for the first time since 1954, that can be changed...
...This timidity is surprising considering Bush's top economic adviser has been Larry Lindsey, the former Fed governor who, by documenting the supply-side effects of the Reagan tax cuts in his book The Growth Experiment, vindicated the Laffer curve...
...Implement dynamic scoring now, and the good effects of eliminating the automatic pro-tax bias of the past could be with us for decades...
...In truth, neither Lindsey nor Bush is to blame...
...For the time being, the JCT continues to operate with the same staff, using the same methods they have always used...
...House rules were changed specifically to allow dynamic scoring, but it has never been used for any proposed tax change...
...Lindsey's supply-side views are on record...
...In the heady days of early 1995, when Republicans thought they could do anything, budget cutters feared that by improving the revenue picture, dynamic scoring would undermine their efforts to reduce spending...
...Later Ken Kies, the new Republican staff director of the JCT, did make an Bush can finally change all this because for the first time in decades, Republicans control both OTA and the JCT...
...Under this "static scoring" method the accountants made no attempt to estimate how tax changes might change the behavior of taxpayers...
...Part of the reason was innocent inertia: Static scoring is much easier than trying to calculate how a tax change might alter incentives for work, saving, and investment...
...So the House and Senate Budget Committee chairmen, Congressman John Kasich (R-OH) and Senator Pete Domenici (R-NM), essentially conspired to kill dynamic scoring in Congress through an unusual joint hearing of their two committees on January 10,1995.Virtually every witness trashed the idea...
...A Republican committee staffer was told afterward by one of his Democratic counterparts that had the Democrats organized the hearing, the same witnesses would have been invited...
...Assuming that a tax increase won't discourage economic activity will produce an overestimate of the revenue gains from tax increases and an underestimate for tax cuts.Yet no sound business calculates the effect of price changes this way...
...For fear of inside-the-Beltway ridicule, neither the campaign nor the administration has argued that tax cuts will boost incentives to work and invest, thus recovering much of the alleged $1.6 trillion cost of the tax cut...
...their estimates varied substantially from their congressional counterparts',Treasury would be accused of fudging the numbers to suit Republican political goals...
...Everyday businesses "score" price cuts dynamically, knowing that cutting the prices of goods will likely increase sales...
...Eventually, economists replaced the accountants, and computers replaced adding machines...
...In the 1970s, a few economists such as Paul Craig Roberts, Martin Feldstein, and the late Norman Ture began criticizing static scoring...
...His counterpart, Charles Grassley (R-IA), chairman of the Senate Finance Committee, has expressed support for dynamic scoring in the past...
...BY BRUCE BARTLETT One reason the Bush administration's rationale for a tax cut keeps shifting—from returning the people's money, to averting recession, to avoiding a surplus-induced spending binge—is that from the beginning the Bush camp put the most persuasive argument off limits...
...Cut prices, and sales would do more to improve the tax climate in America than any single tax bill Bush is likely to get through Congress without such reform...
...Prompted by numerous studies showing dramatic positive taxpayer responses to the 1978 and 1981 capital-gains rate cuts, and a negative response to the 1986 rate increase, the first Bush Administration halfheartedly resumed the battle, but also backed down in the end...
...Taxes, the price of government, are no different...
...The crucial estimates for how tax changes will affect federal revenues come from just a handful of staffers in two offices: the Treasury Department's Office of Tax Analysis (OTA) and Congress's Joint Committee on Taxation (JCT...
...With the Treasury shop now under Democratic control, JCT economists feared being ridiculed by Treasury for using unproven methods solely to aid a Republican agenda...
...Congress's Joint Committee on Taxation, still under Democratic control, would not support the change, and Treasury's revenue estimators feared that if effort to get his staff to use dynamic scoring, but he was stymied by the same problem Republicans had at Treasury when the Democrats controlled Congress...
...Fearing dynamic scoring would undermine the fight against the deficit, the GOP Budget Committee chairmen, Kasich and Domenici, conspired to kill the idea...
Vol. 34 • March 2001 • No. 2
