Since I’m a big advocate of the Laffer Curve, that means I favor dynamic scoring. This is the common-sense observation that you can’t figure out the effect of tax changes on revenue without first estimating the impact on taxable income.
And I’ve shared some very persuasive data and analysis in favor of the Laffer Curve and dynamic scoring.
The huge increase in taxes paid by upper-income taxpayers after Reagan slashed the top income tax rate.
The fact that the overwhelming majority of CPAs believe in significant feedback effects.
Even left-wing economists admit that you lose revenue if tax rates get too high.
International bureaucracies even admit that there are “Laffer Curve” limits that make some tax hikes self-defeating.
Notwithstanding all this evidence, we have a system in Washington that is based on static scoring, which simplistically assumes a linear relationship between tax rates and tax revenue.
The Joint Committee on Taxation makes the revenue estimates, and reformers argue the status quo is biased in favor of higher tax and have long urged the system to be modernized to get more accurate numbers.
Needless to say, establishment leftists don’t want to see any changes.
Edward Kleinbard, a former Staff Director for the Joint Committee on Taxation, writes with disapproval in the New York Times that Republicans want to change the existing methodology for estimating the revenue impact of changes in tax policy.
…at the top of their to-do list is changing how the government measures the impact of tax cuts on federal revenue: namely, to switch from so-called static scoring to “dynamic” scoring. While seemingly arcane, the change could have significant…consequences.
Here’s his description of the issue, which is reasonably fair.
…conventional estimates do not…incorporate macroeconomic behavioral changes. Dynamic scoring does. Proponents point out, correctly, that if a tax proposal is large enough, then those sorts of feedback effects can aim the entire economy on a slightly different path. Such proponents argue that conventional projections are skewed against tax cuts, because they do not consider that cutting taxes could lead to higher economic output, which would make up at least some of the lost revenues. They maintain that dynamic scoring will, therefore, be both more neutral and more accurate than current methodologies.
He then gives two reasons why he doesn’t like dynamic scoring.
First, he argues that a modernized system will be imprecise.
Economists disagree on the answers, and different models’ predicted feedback effects vary wildly, depending on the values selected for those uncertain assumptions. …Consider the nonpartisan scorekeepers’ estimates of the consequences of a tax-reform bill proposed last year by Representative Dave Camp, Republican of Michigan. Using different models and plausible inputs, the scorekeepers estimated that, under the bill, total gross domestic product might rise between 0.1 percent and 1.6 percent over the next decade — a 16-fold spread in projected outcomes. Which result should be the basis of congressional scorekeeping?
He’s certainly right that economic models will generate a range of predictions.
And I’ll be the first to admit that models are woefully inadequate in their attempts to measure millions of people making billions of decisions. Heck, I’ve even pointed out that economists are terrible forecasters.
But Kleinbard is basically arguing that it’s better to be exactly wrong than inexactly right.
Under the current system, for instance, the JCT will simplistically calculate that a doubling of tax rates will lead to a near-doubling of tax revenue.*
That’s very precise, but it’s also very wrong. In reality, a doubling of tax rates would have a very large and very negative impact on economic performance. Shouldn’t lawmakers have a system that at least gives them an estimate, or a range of estimates, to suggest the possible real-world consequences?
This video explains what is wrong with the Joint Committee on Taxation’s methodology.
Kleinbard’s second argument against dynamic scoring is based on his assumption that bigger government is good for the economy since the government spends money wisely.
I’m not joking.
Federal deficits are on an unsustainable path (as it happens, because of undertaxation, not excessive spending). Simply cutting taxes against the headwind of structural deficits leads to lower growth, as government borrowing soaks up an ever-increasing share of savings. …these models are political statements. They show the biggest economic effects by assuming that tax cuts are financed by unspecified future spending cuts. The smaller size of government, not the tax cuts by themselves, largely drives the models’ results. …the models are not a step toward more neutral revenue estimates, because they assume that, while individuals make productive investments, government does not. In reality, government spending contributes significantly to economic output. …When revenues do in fact decline and deficits rise, those same proponents will push for steep cuts in government insurance or investment programs, because they will claim that the models demand it.
Wow. I hardly know where to start. So many wrong assertions in so little space.
I guess I’ll begin by pointing out that it’s absurd to argue America’s fiscal problems are the result of taxes being too low. But if you don’t believe me, just look at the White House’s own numbers.
But the most important point to address is that Kleinbard thinks government spending is more efficient than private spending.
That arguably might be true if government was consuming only 2 percent of GDP and certain core “public goods” weren’t being provided.
But that’s hardly the case today, or at any time in recent history.
The burden of government spending is well beyond the growth-maximizing level in the United States. This video elaborates.
The evidence strongly indicates we need less government rather than more. Unless, of course, you think the United States would grow faster if we were more like France or Greece.
* There are some “micro-economic” feedback effects in the current system, so even the JCT wouldn’t assert that revenues would double if tax rates rose by 100 percent.
P.S. Here’s my debunking of the straw-man debunking of the Laffer Curve and dynamic scoring.
[…] The folks who don’t like pro-growth tax policy and thus claim that changes in tax policy have no impact on the economy. […]
[…] need to realize, though, that the Laffer Curve is very real. They may not like it, but there’s very strong evidence that imposing lots of taxes does not necessarily mean […]
[…] self-imposed constraints of static revenue and distributional neutrality, their two guidelines were dynamic revenue neutrality and no tax increase for any income […]
[…] that taxation has no effect on the economy does not stop progressive/statist/altruists from proposing such spurious arguments. It also induces them to presume that the relationship between tax revenue and tax levels is […]
[…] explained, would produce more accurate data than “static scoring,” which is based on rather bizarre and untenable assumption that the economy’s output is unaffected by […]
[…] effect, Conover is generating more accurate numbers based on dynamic analysis (in the same way advocates of dynamic scoring try to fix mistakes in revenue estimates that assume no behavioral […]
[…] also think the traditional approach, known as “static scoring,” creates a bias for bigger government because it falsely implies that ever-higher tax rates […]
[…] Kleinbard, a former Staff Director for the Joint Committee on Taxation, writes with disapproval in the New York Times that Republicans want to change the existing methodology for estimating the […]
Don’t you think the Laffer curve should also have a “shrinkage maximizing point” to emphasize the negative effects of too much taxation?
This bothers me in so many ways I cannot find the words.
What I can point out is this. 90% of my “government taxes” go to hire people who use that money looking for more ways to find various fees and penalties they can foist upon me and an equally innocent public sector. However, there are so many agencies, bureaucracies and institutions that want my money to keep them alive that there is scarcely a day that I do not break some sort of law that I may or may not have even known existed. An agency can then decide to fine me or collect some fee as punishment. And once funded by my taxes they use thes fees and fines to further develop their budget so that they might control even more of my disposable income. Can anybody out there explain to me how that government spending does anyone BUT remove productive investment from society?
[…] WAIT, THERE’S MORE… […]
Any reader that thinks confiscatory taxes and big government can solve any problems, should be forced to ask themselves “why is France still an economic basket case”? Since it’s doubtful they will set aside old biases, the thought will never cross their mind. Instead, when dollar-based debts explode higher with the rising dollar (as capital flees socialist/fraudulent govt’s for the relative safety of the dollar), they will blindly follow the direction of govt (mis)leaders when they point the figure at some foreign boogieman or the “evil rich” – 99% of which provide the needed capital for jobs and/or jobs directly.
Taken in isolation, government spending does contribute to economic output.
However, the “unseen” is that government’s use of resources is not as economically effective as private use. Therefore the net effect of taking resources that would have gone to private use is important. Private use is always limited by the profit motive to the most effective use. Government use is determined by political motives and therefore not limited. Therefore, the net effect (above core needs) will almost always be negative.