Skip to comments.`Dynamic' Scoring Finally Ends Debate On Taxes, Revenue
Posted on 04/01/2003 12:35:14 PM PST by Steve Schulin
DO TAX CUTS pay for themselves? That's been the hot debate of American political economy for the better part of three decades. But it ended last week -- with a whimper.
The great argument got its start in 1974, when a White House chief of staff named Donald Rumsfeld sent his deputy, Richard Cheney, to have lunch with an ebullient young economist named Art Laffer and his journalistic sidekick, Jude Wanniski. According to local lore, Mr. Laffer sketched a curve on a cocktail napkin suggesting that a cut in income taxes could provide such a spark to the economy that government revenues would rise, not fall. The free lunch was born.
The problem with Mr. Laffer's graph, however, was that it had no numbers on the axes. How much would growth be boosted? At what level of taxation would tax cuts become self-financing? Those remained the big unknowns as the issue became a central question of American politics.
In Washington, the debate became a bureaucratic battle focusing on the Congressional Budget Office and Joint Committee on Taxation, the two agencies responsible for advising Congress on the costs of budget and tax changes. By convention, both use "static" scorekeeping that assumes budget and tax changes have no effect on overall economic growth. Supply-side proponents have criticized both agencies relentlessly for this, but to no avail -- until last week.
Enter Douglas Holtz-Eakin, an economist on leave from Syracuse University and an avowed advocate of supply-side "dynamic" scoring. A few months ago, Republican congressional leaders plucked him out of a job at the White House and made him director of the CBO. Last week, in his agency's analysis of President Bush's tax and budget plan, he provided his new bosses with their first taste of dynamic scoring.
The results: Some provisions of the president's plan would speed up the economy; others would slow it down. Using some models, the plan would reduce the budget deficit from what it otherwise would have been; using others, it would widen the deficit.
But in every case, the effects are relatively small. And in no case does Mr. Bush's tax cut come close to paying for itself over the next 10 years.
FOR THE HANDFUL of people who read the report in its entirety, there is another surprise. Of the nine different economic models used to analyze the president's plan, only two showed a large improvement in the deficit over the next decade as a result of "supply side" effects. Both those models got their results by assuming that after 2013, taxes would be raised to eliminate the remaining deficit. The theory is that people will work harder between 2004 and 2013 because they know that their taxes will be going up, and will want to earn more money before those tax increases take effect.
Using those same models, if the assumption is changed so that government spending falls after 2013 to close the deficit -- the outcome preferred by most supply-siders -- the economic benefits disappear. The president's plan would cause the deficit to become slightly wider over the next 10 years than it would have been otherwise.
Advocates of dynamic scoring have tried to make the most of these tepid results, calling the report a good first step. "You've got to crawl before you can walk, and you've got to walk before you can run," says economist Bruce Bartlett, a senior fellow at the National Center for Policy Analysis and former Reagan administration Treasury Department economist who pushed Mr. Holtz-Eakin for the CBO post. Democratic opponents are still at arms, fearing the report is the camel's nose under the tent.
But it should make both sides wonder what the hubbub of the past 30 years has been all about.
Mr. Holtz-Eakin says the new analysis, while costly and time consuming -- it took 35 government analysts a month and a half to complete the work -- is still a worthy effort, helping lawmakers to find the particular policies that encourage economic growth the most. Former CBO chief Robert Reischauer agrees that "it was a very useful exercise." And former CBO director Dan Crippen, who many think lost his chance for reappointment over the dynamic-scoring issue, says the results "validate what CBO has been saying all along, that depending on the assumptions, the effects could be positive or negative."
No doubt, a lot of questions will be raised about how far to push this analysis. Democrats, for instance, may start advocating "dynamic scoring" for education spending, which many believe also has positive effects on the economy.
But the great debate launched by Mr. Laffer and his napkin in 1974 is for the most part over. Certainly, tax cuts can improve overall economic growth. And certainly, revenues may rise as a result. But at current levels of taxation, those effects are relatively small. There is no free lunch.
Alan Murray is Washington bureau chief for CNBC and co-host of Capital Report, which airs Tuesday-Friday at 9 p.m.
"'They did not analyze the impact of the tax cuts by themselves,' said William Beach, chief economist at the Heritage Foundation, a conservative research group."
I understand that Congress' Joint Committee on Taxation is hiring four folks to work full time on "dynamic scoring". I look forward to seeing not just estimates on proposed tax cuts, but studies running historical data through the various models with an eye on the "tax rate - revenue" connection.
I never could understand their position on that. Of course, I can never understand their position on anything.
I almost met Dr. Laffer.
When I worked in LA during the mid-Nineties, I spotted the investor relations VP of my company in the fine Italian seafood restaurant across the street talking with someone who was a ringer for Art Laffer. After lunch I dropped in at the VP's office.
ME: Was that Arthur Laffer with you across the street?
VP: Yeah. You should have come over and introduced yourself. Art's pretty approachable. He was my economics prof at USC.
ME: I remember how he ripped Mitchell Rogovin a new one in 1980 on TV.
VP: Art would have liked someone remembering that. We were finishing a debate we'd started last night at Chris Cox's house.
ME: You know Christopher Cox?!
VP: Yeah, I've known him for years. Dan Quayle was in town, and Chris threw a dinner party for him. I hadn't talked to Dan in years, and then I ran into Art.
ME: You know Dan Quayle?!
Needless to say, I was blown away.
Sadly, this nation is not willing to do what it takes to make us strong... they can only think as far ahead as how to buy their next new car or $500 leather jacket...
Very good. A one line refutation of global warming.
We were taking about global warming, weren't we?
Socialists aren't interesting in maximizing government revenue. They are interested in maximizing control. This is done by maximizing goverment revenue as a fraction of all revenue. They would be happy to live in a pig sty, so long as they get the spot with the best mud and control who gets how much slop.
I quit watching the Capital Report after I finally figured out he was partial to the Dems. He had me fooled for awhile though!
If the shoe fits!
Ah, therein lies the fault with my reasoning. I was analyzing the socialists using logic. My bad.
I think you nailed it on the head. They are an amazing bunch.
I knew that. And my computer predicted you would say it.
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