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Archive for the ‘CBO’ Category

I praised Michael Ramirez a few days ago for his clever political cartoons, so it’s time to “spread the wealth” and draw attention to a couple of superb cartoons by Chuck Asay (I think his hometown paper is the Colorado Springs Gazette).

Since I’ve bashed the biased and inaccurate work of the Congressional Budget Office, I found this cartoon very amusing.

And this cartoon on business taxation is very appropriate after yesterday’s post about a potential corporate tax rate reduction from the Obama Administration.

By the way, Obama at one point did say that “no business wants to invest in a place where the government skims 20 percent off the top.”

Unfortunately, he made that statement in Ghana and I assumed he only had supply-side feelings while outside of America. But I’m a believer in redemption, so maybe his corporate tax proposal will be good and the beginning of a journey in the right direction.

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I commented yesterday about the silly idea, being promoted by a few politicians, to impose a tax on toilet paper. That post mostly was an opportunity to have some fun mocking greedy government because even a dour pessimist like me doesn’t expect that idea to get very far.

But there’s a new tax idea that sounds equally absurd, but actually is a much greater threat to taxpayers. The bureaucrats at the Congressional Budget Office have issued a report suggesting a tax based on the number of miles driven. Since such a tax almost surely (despite initial assertions to the contrary) would be in addition to existing gas taxes, this would be a way for politicians to grab more of our money.

But that’s not the only thing we should worry about. To impose such a tax, the government obviously would need the ability to track our vehicle usage. At the risk of stating the obvious, my driving patters are not the government’s business.

Here’s a blurb from a report in The Hill.

The Congressional Budget Office (CBO) this week released a report that said taxing people based on how many miles they drive is a possible option for raising new revenues and that these taxes could be used to offset the costs of highway maintenance at a time when federal funds are short. The report discussed the proposal in great detail, including the development of technology that would allow total vehicle miles traveled (VMT) to be tracked, reported and taxed, as well as the pros and cons of mandating the installation of this technology in all vehicles. …The report was requested by Senate Budget Committee Chairman Kent Conrad (D-N.D.), who held a hearing on transportation funding in early March. In that hearing, Transportation Secretary Ray LaHood said the Obama administration is hoping to spend $556 billion over the next six years, much of which would go to federal transportation improvement projects. Conrad said in response that federal funds are tight, and in asking for recommendations on how to raise that money, he noted the possibility of a VMT tax as a way to solve the problem of collecting less in taxes as people move to more fuel-efficient vehicles.

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This won’t surprise anyone with a pulse, but Obama, Reid, Pelosi, et al, were disingenuous about the costs of Obamacare. The Congressional Budget Office has released revised numbers and government-run healthcare will cost 8.6 percent more than what was projected in last year’s forecast. This doubtlessly is just the first of many “re-estimates” that will occur, with each one showing the program to be far more costly than initially projected.

This obviously shows the mendacity of Democrat politicians, but let’s also make sure that CBO takes a lot of the blame. The bureaucrats deliberately low-balled expenditure estimates to please their political masters. If Republicans had any brains, they would fire all of them.

Here’s a brief blurb from the Wall Street Journal’s editorial on the topic.

CBO says the entitlement’s health insurance subsidies will cost $1.13 trillion between 2012 and 2021, not $1.04 trillion, the prior estimate. This 8.6% jump is the result of revised assumptions, the so-called technical factors in CBO’s budget model. The bill’s total cost now stands at $1.445 trillion, according to another recent CBO estimate. Remember that all of these are fictitious numbers that reflect Congressional gaming of CBO conventions to make it seem as if ObamaCare “saves” money. But now, even under these conventions, CBO is conceding that it significantly underestimated the bill’s cost. If the propeller heads decide to add a few more trillion dollars in new spending, they might get somewhat closer to the bill’s true cost.

And because I like to brag when I get something right (to be fair, everyone knew the CBO numbers were dishonest and wrong, so I wasn’t exactly making a brilliant observation), I invite people to re-watch my video explaining how the politicians and their minions were lying to us.

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Grousing about the GOP’s timidity in the battle against big government will probably become an ongoing theme over the next few months, and  let’s start with two items that don’t bode well for fiscal discipline.

First, it appears that Republicans didn’t really mean it when they promised to cut $100 billion of so-called discretionary spending as part of their pledge. According to the New York Times,

As they prepare to take power on Wednesday, Republican leaders are scaling back that number by as much as half, aides say, because the current fiscal year, which began Oct. 1, will be nearly half over before spending cuts could become law.

This is hardly good news, particularly since the discretionary portion of the budget contains entire departments, such as Housing and Urban Development, that should be immediately abolished.

That being said, I don’t think this necessarily means the GOP has thrown in the towel. The real key is to reverse the Bush-Obama spending binge and put the government on some sort of diet so that the federal budget grows slower than the private economy. I explain in this video, for instance, that it is simple to balance the budget and maintain tax cuts so long as government spending grows by only 2 percent each year.

It is a good idea to get as many savings as possible for the remainder of the 2011 fiscal year, to be sure, but the real key is the long-run trajectory of federal spending.

The other item for discussion is the GOP’s apparent interest in retaining Douglas Elmendorf, the current Director of the Congressional Budget Office.

Many of you will remember that the CBO cooked the books last year to help ram through Obamacare. Under Elmendorf’s watch, CBO also was a relentless advocate and defender Obama’s failed stimulus. And CBO under Elmendorf published reports saying higher taxes would improve economic performance.

But Elmendorf’s statist positions apparently are not a problem for some senior Republicans, as reported by The Hill.

The new House Budget Committee chairman, Rep. Paul Ryan (R-Wis.), gave a very public endorsement of the embattled head of the Congressional Budget Office during his first major speech as committee head Wednesday night. …“You’re doing a great job at CBO, Doug,” Ryan said after receiving the first annual Fiscy Award for his efforts at tackling the national debt. He added that he looked forward to crunching budget numbers with him in the future.

In the long run, the failure to deal with the problems at CBO (as well as the Joint Committee on Taxation) may cause even more problems than the timidity about cutting $100 billion of waste from the 2011 budget. Given the rules on Capitol Hill, it makes a huge difference whether CBO and JCT are putting out flawed numbers.

I’ve already written that fixing the mess at CBO and JCT is a critical test of GOP resolve, and I actually thought this would be a relatively easy test for them to pass. It is an ominous sign that Republicans aren’t even trying to clean house.

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 I’ve already written about the terrible work of the Congressional Budget Office. The CBO did an awful job on the stimulus, for instance, repeatedly asserting that diverting money from the private sector to government somehow would create jobs. CBO also was a disaster on Obamacare, claiming that a giant new entitlement program would reduce budget deficits. And the legislative bureaucracy even has argued that higher tax rates boost growth.

That sounds absurd (and it is), but CBO is not the only taxpayer-funded bureaucracy on Capitol Hill producing this kind of nonsensical analysis. The Congressional Reserach Service just published a new report asserting that higher tax rates will boost economic performance. Here’s an excerpt from that CRS publication.

…it is ambiguous whether tax cuts lead to more or less work, saving, and investment. The expiration of the tax cuts would nevertheless reduce the budget deficit, absent other policy changes, which economic theory predicts would have a positive effect on the economy in the long run.

To be fair, CRS doesn’t actually claim higher taxes are good for growth. And neither does CBO. But CRS and CBO both assert that there is no clear evidence that higher taxes hurt growth. Budget deficits, however, supposedly have a very negative impact on economic performance according to these Capitol Hill bureaucrats. More specifically, CRS and CBO believe that government borrowing leads to higher interest rates, and they think that higher interest rates reduce investment. And since investment is a key to long-run growth, this leads them to endorse any policy – including higher taxes – that reduces red ink.

Taking the CRS and CBO analysis to its logical extreme (and neither bureaucracy has stated that there are limits to their methodology), tax rates of 100 percent would be the most effective way of maximizing prosperity.

This video explains that the real problem is spending, and that deficits are just a symptom of a government that is too big. This is not to say that CRS and CBO are completely wrong. We have record budget deficits and very low interest rates today, but it’s possible that interest rates might be even lower without all the red ink. And it’s certainly true that interest rates are one of the many factors that determine investment choices, so there’s nothing wrong with including them in the equation.

But magnitudes matter. For all intents and purposes, CRS and CBO want us to believe that more government borrowing will have a very significant impact on interest rates and that those higher interest rates will have a very negative impact on investment. Yet neither bureaucracy offers any evidence for these linkages, in large part because the academic research shows that the relationships between deficits, interest rates, and investment are weak.

By contrast, CRS and CBO have no problem supporting higher tax rates – including more double taxation of income that is saved and invested. Yet there is considerable evidence that punitive tax rates have a significant impact not only on decisions to earn income and be productive, but also on decisions whether to consume today or to save and invest (and thus consume in the future). CRS and CBO also assume, rather naively, that politicians would use any additional revenue for deficit reduction instead of new spending.

Let’s call this the triumph of left-wing theory over real-world evidence. To add insult to injury, the sloppy analysis at CRS and CBO is financed by our tax dollars. So we pay bureaucrats so they can tell politicians to seize more money from us. Gee, what’s not to love about a scam like that?

P.S. If Republicans are actually serious about restraining government spending, CRS and CBO are target-rich environments. Just saying.

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While I’m glad Republicans are finally talking about smaller government, I’ve expressed some disappointment with the GOP Pledge to America. Why “reform” Fannie and Freddie, I asked, when the right approach is to get the government completely out of the housing sector. Jacob Sullum of Reason is similarly underwhelmed. He writes:
In the “Pledge to America” they unveiled last week, House Republicans promise they will “launch a sustained effort to stem the relentless growth in government that has occurred over the past decade.” Who better for the job than the folks who ran the government for most of that time? …Republicans, you may recall, had a spending spree of their own during George W. Bush’s recently concluded administration, when both discretionary and total spending doubled — nearly 10 times the growth seen during Bill Clinton’s two terms. In fact, says Veronique de Rugy, a senior research fellow at George Mason University’s Mercatus Center, “President Bush increased government spending more than any of the six presidents preceding him, including LBJ.” Republicans controlled the House of Representatives for six of Bush’s eight years.
Redemption is a good thing, however, so maybe the GOP actually intends to do the right thing this time around. One key test is whether Republicans do a top-to-bottom housecleaning at both the Congressional Budget Office and the Joint Committee on Taxation.
 
These Capitol Hill bureaucracies are not well known, but they have enormous authority and influence. As the official scorekeepers of spending (CBO) and tax (JCT) bills, these two bureaucracies can mortally wound legislation or grease the skids for quick passage.
 
Unfortunately, that clout gets used to dramatically tilt the playing field in favor of bigger government. It was CBO that claimed that Obama’s stimulus created jobs, even though the head of CBO was forced to admit that the jobs-created number was the result of a Keynesian model that was rigged to show exactly that result . You would think that would shame the bureaucrats into producing honest numbers, but CBO continues to produce absurd job creation estimates regardless of the actual rate of unemployment.
 
CBO favors deficits and debt when it is asked to analyze proposals for more spending, but it rather conveniently changes its tune when the discussion shifts to tax increases. Since we’re on the topic of twisted economic analysis, CBO actually relies on a model which, for all intents and purposes, predicts that economic performance is maximized with 100 percent tax rates.
 
The Joint Committee on Taxation, meanwhile, is infamous for its assumption that taxes have no impact – at all – on economic output. In other words, instead of showing a Laffer Curve, JCT would show a straight line, with tax revenues continuing to rapidly climb even as tax rates approach 100 percent.  This creates a huge bias against good tax policy, yet JCT is impervious to evidence that its approach is wildly flawed.
 
And don’t forget that CBO and JCT both bear responsibility for Obamacare since they cranked out preposterous estimates that a giant new entitlement would lead to lower budget deficits
 
Not that we need additional evidence, but the head of the CBO just repeated his higher-taxes-equal-more-growth nonsense in testimony to the Senate Budget Committee. With this type of mindset, is it any surprise that fiscal policy is such a mess?
Douglas Elmendorf said extending breaks due to expire at year’s end would increase demand in the next few years by putting more money in consumers’ pockets. Over the long term, he said, the tax cuts would hurt the economy because the government would have to borrow so much money to finance them that it would begin competing with private companies seeking loans. That, in turn, would drive up interest rates, Elmendorf said.
I’ve already written once about how the GOP sabotaged itself when it didn’t fix the problems with these scorekeeping bureaucracies after 1994. If Republicans take power and don’t raze CBO and JCT, they will deserve to become a permanent minority party.

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One of the many disappointing things about Republicans is that they fail to correct problems when they get power. After the 1994  “Gingrich Revolution,” the GOP had complete control of Capitol Hill. This meant complete authority over the Congressional Budget Office and Joint Committee on Taxation. Did Republicans use this power to fire the old staff and put in people who understood economics? Of course not. I don’t know if this is because Republicans are stupid or if it’s because they’re too timid to take steps that would generate complaints from their enemies. Regardless, what really matters is that CBO and JCT are just as biased today as they were 20 years ago. Diana Furchtgott-Roth of the Hudson Institute exposes CBO’s latest shoddy Keynesian analysis. She is correct, and the people making these same arguments 20 years ago were correct. And I’m afraid people will be saying the same things 20 years from now. Which leads me to think that maybe the best approach is to get rid of these bureaucracies. 
…on Tuesday the nonpartisan Congressional Budget Office issued a report showing that the American Recovery and Reinvestment Act of 2009 increased the number of people employed by between 1.4 and 3.3 million people in the second quarter of 2010 and lowered unemployment by 0.7 to 1.8 percentage points. CBO concludes that without the Recovery Act unemployment, which stood at 9.5% in July, might exceed 10% and possibly be above 11%. There’s just one problem. CBO’s latest figures are inconsistent with its claims of the effects of the stimulus bill when it was passed in February 2009. If its models failed to accurately predict the effects of the stimulus bill then, why should we believe the models now? This is important because some are taking the CBO report as proof that the stimulus bill is working and so we need…more stimulus. …After passage of the stimulus bill, in a March 2009 letter to Iowa Senator Chuck Grassley, CBO predicted that the unemployment rate in the last quarter of 2009 would rise to 9% without the stimulus package, from its then-current level of 8.2%. With the stimulus, CBO said, the unemployment rate would range from 7.8% to 8.5%. The actual rate in December, 11 months after enactment of the stimulus, was 10%, far higher than CBO said it would be absent the stimulus. …If Americans had known in February of 2009 that the $787 billion stimulus package (whose cost CBO later raised to $862 billion) would not lead to declines in unemployment, but instead a substantial increase in the unemployment rate to 9.5%, opposition to the spending would have been practically universal. Put it another way – if Americans were asked now whether they would prefer today to have back the February 2009 unemployment rate of 8.2% and the $862 billion spent on stimulus, they would say yes. Some say things would have been worse if the stimulus funds had not been spent. They assume that more government spending, including the $862 billion stimulus, must be good for the economy. This form of Keynesian economics fell out of fashion decades ago everywhere, except in the halls of power in Washington. If more government spending always helped the economy, why stop at $862 billion? Why not give each American an unlimited bank account? Then the unemployment rate would likely rise to 100%. But some economists would still offer unverifiable models to “prove” the benefit to the American public.

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I hope the title of this post is an exaggeration, but it’s certainly a logical conclusion based on what is written in the Congressional Budget Office’s updated Economic and Budget Outlook. The Capitol Hill bureaucracy basically has a deficit-über-alles view of fiscal policy. CBO’s long-run perspective, as shown by this excerpt, is that deficits reduce output by “crowding out” private capital and that anything that results in lower deficits (or larger surpluses) will improve economic performance – even if this means big increases in tax rates.

CBO has also examined an alternative fiscal scenario reflecting several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period. That alternative scenario embodies small differences in outlays relative to those projected under current law but significant differences in revenues: Under that scenario, most of the cuts in individual income taxes enacted in 2001 and 2003 and now scheduled to expire at the end of this year (except the lower rates applying to high-income taxpayers) are extended through 2020; relief from the AMT, which expired after 2009, continues through 2020; and the 2009 estate tax rates and exemption amounts (adjusted for inflation) apply through 2020. …Under those alternative assumptions, real GDP would be…lower in subsequent years than under CBO’s baseline forecast. …Under that alternative fiscal scenario, real GDP would fall below the level in CBO’s baseline projections later in the coming decade because the larger budget deficits would reduce or “crowd out” investment in productive capital and result in a smaller capital stock.

There’s nothing necessarily wrong with CBO’s concern about deficits, but looking at fiscal policy through that prism is akin to deciding who wins a baseball game by looking at what happened during the 6th inning. Yes, government borrowing drains capital from the productive sector of the economy. And nations such as Greece are painful examples of what happens when governments go too far down this path. But taxes also undermine economic performance by reducing incentives to work, save, and invest. And nations such as France are gloomy reminders of what happens when punitive tax rates discourage productive behavior.

What’s missing for CBO’s analysis is any recognition or understanding that the real problem is excessive government spending. Regardless of whether spending is financed by borrowing or taxes, resources are being diverted from the private sector to government. In other words, government spending is the disease and deficits are basically a symptom of that underlying problem. Indeed, it’s worth noting that there’s not much evidence that deficits cause economic damage but plenty of evidence that bloated public sectors stunt growth. This video is a good antidote to CBO’s myopic focus on budget deficits.

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Like the swallows returning to Capistrano, the Congressional Budget Office follows a predictable pattern of endorsing policies that result in bigger government. During the debate about the so-called stimulus, for instance, CBO said more spending and higher deficits would be good for the economy. It then followed up that analysis by claiming that the faux stimulus worked even though millions of jobs were lost. Then, during the Obamacare debate, CBO actually claimed that a giant new entitlement program would reduce deficits. Now that tax increases are the main topic (because of the looming expiration of the 2001 and 2003 tax bills), CBO has done a 180-degree turn and has published a document discussing the negative consequences of too much deficits and debt.
…persistent deficits and continually mounting debt would have several negative economic consequences for the United States. Some of those consequences would arise gradually: A growing portion of people’s savings would go to purchase government debt rather than toward investments in productive capital goods such as factories and computers; that “crowding out” of investment would lead to lower output and incomes than would otherwise occur. …a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. …If the United States encountered a fiscal crisis, the abrupt rise in interest rates would reflect investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation.
At some point, even Republicans should be smart enough to figure out that this game is rigged. Then again, the GOP controlled Congress for a dozen years and failed to reform either CBO or its counterpart on the revenue side, the Joint Committee on Taxation (which is infamous for its assumption that tax policy has no impact on overall economic performance).

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You don’t need to watch old Gunsmoke episodes if you want to travel into the past. Just read the latest Congressional Budget Office “research” claiming that Obama’s so-called stimulus “increased the number of full-time-equivalent jobs by 1.8 million to 4.1 million.” CBO’s analysis is a throwback to the widely discredited Keynesian theory that assumes you can enrich yourself by switching money from your left pocket to right pocket. For all intents and purposes, CBO wants us to believe their Keynesian model and ignore real world data. This is akin to the famous line attributed to Willie Nelson, who was caught with another woman by his wife and supposedly said, “Are you going to believe me or your lying eyes?”

Using its own Keynesian model, the White House last year said that wasting $800 billion was necessary to keep the unemployment rate from rising above 8 percent. Yet the joblessness rate quickly jumped to 10 percent and remains stubbornly high. We’ve already beaten this dead horse (here, here, here, here, and here), in part because the White House has embarrassed itself even further with silly attempts to find some way of turning a sow’s ear into a silk purse. This is why Obama Administration estimates have evolved from “jobs created” to “jobs saved” to “jobs financed.”

The CBO’s most recent “calculations” are just another version of the same economic alchemy. But don’t believe me. Buried at the end of the report is this passage, where CBO basically admits that its new “research” simply plugged new spending numbers into its Keynesian formula. This sounds absurd, and it is, but don’t forget that these are the same geniuses that predicted that a giant new healthcare entitlement would reduce long-run budget deficits.

CBO’s current estimates of the impact of ARRA on output and employment differ slightly from those presented in its February 2010 report primarily because the agency has revised its estimates of ARRA’s impact on federal spending on the basis of new information. Outlays resulting from ARRA in the first quarter of calendar year 2010 were higher than the amount that CBO projected in February 2010 in preparing its estimate of the law’s likely impact on output and employment, primarily because a larger-than-expected amount of refundable tax credits was disbursed in the first quarter rather than later in the year. That change makes the estimated impact of ARRA on output and employment in the first quarter slightly higher than what CBO projected in February.

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I have a column in the Washington Times speculating on ways we could lower our tax bills if we could use the same creative accounting that the Congressional Budget Office and Joint Committee on Taxation used to help impose Obamacare on the nation. Lots of tongue-in-cheek sarcasm:

If you’re still struggling over your tax return, wondering why you pay so much to finance a dysfunctional and wasteful government, maybe it’s time you adopted the same rules used by government number crunchers. The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) helped push the health bill across the finish line by forecasting that (don’t laugh) a giant new entitlement program for government-run health care would reduce long-run budget deficits. A closer look at what they did suggests that as we approach April 15, taxpayers could save a bundle of money if they used the same creative accounting as CBO and JCT. For example: When CBO and JCT concoct their official scores about increases or decreases in government spending or revenue, they use “base-line” math. So when CBO said Medicare spending would be cut by several hundred billion dollars over the next 10 years, the first thing you need to understand is that Medicare spending actually will be increasing during that time period from $528 billion this year to about $1 trillion in 2020. But CBO says Medicare spending will be “cut” because it is not increasing even faster. Imagine if you got to do the same thing with your tax return. Not many of us received raises last year because of an economy weakened by bad government policy. But let’s say you were one of the lucky ones (a government employee, perhaps?) and you got a $5,000 raise. Unfortunately, Uncle Sam is going to want a big chunk of that additional money. Here’s where CBO accounting would be a big help. Why don’t you assume that you were going to get a raise of $10,000. Because your pay “only” went up by $5,000, you can claim your pay was reduced. The IRS will come down on you like a ton of bricks, but you can tell the agents as they cart you away that you were following official government methodology. (Maybe they’ll go easy on you when you tell them that an identical approach helped push the IRS budget up to $12 billion.)

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Since we’re already depressed by the enactment of Obamacare, we may as well wallow in misery by looking at some long-term budget numbers. The chart below, which is based on the Congressional Budget Office’s long-run estimates, shows that federal government spending will climb to 45 percent of GDP if we believe CBO’s more optimistic “baseline” estimate. If we prefer the less optimistic “alternative” estimate, the burden of federal government spending will climb to 67 percent of economic output. These dismal numbers are driven by two factors, an aging population and entitlement programs such as Medicare, Medicaid, and Social Security. For all intents and purposes, America is on a path to become a European-style welfare state.

If these numbers don’t depress you enough, here are a couple of additional observations to push you over the edge. These CBO estimates were produced last year, so they don’t count the cost of Obamacare. And as Michael Cannon repeatedly has observed, Obamacare will cost much more than the official estimates concocted by CBO. And speaking of estimates, the long-run numbers in the chart are almost certainly too optimistic since CBO’s methodology naively assumes that a rising burden of government will have no negative impact on the economy’s growth rate. Last but not least, the data above only measures federal spending. State and local government budgets will consume at least another 15 percent of GDP, so even using the optimistic baseline, total government spending will be about 60 percent of GDP, higher than every European nation, including France, Greece, and Sweden. And if we add state and local spending on top of the “alternative” baseline, then we’re in uncharted territory where perhaps Cuba and North Korea would be the most appropriate analogies.

So what do we do? There’s no sure-fire solution. Congressman Paul Ryan has a reform plan to reduce long-run federal spending to less than 20 percent of GDP. This “Roadmap” plan is excellent, though it is marred by the inclusion of a value-added tax. Bill Shipman of CarriageOaks Partners put forth a very interesting proposal in a Washington Times column to make the federal government rely on states for tax revenue. And I’ve been an avid proponent of tax competition as a strategy to curtail the greed of the political class since it is difficult to finance redistribution if labor and capital can escape to jurisdictions with better tax law. Any other suggestions?

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While admitting that spending restraint is the ideal approach, Tyler Cowen of Marginal Revolution asks whether a value-added tax (VAT) might be the most desirable of all realistic options for dealing with an unsustainable budget situation.

Read his post for yourself, but I think a fair summary is that he is basically saying that a) there will be a crisis if we don’t do something about future deficits, b) a crisis will result in very bad policy, and c) if we support a VAT now, we will at least be able to extract concessions from the other side.

I have no idea whether there will be a future crisis, but I think the rest of Tyler’s argument is wrong.

But before explaining my position, let’s start by stating what I assume to be our mutual objective, which is to control the size of government. We all agree that there is a problem because government is too big now, and it is projected to get even bigger because of the built-in growth of entitlement programs. One symptom of growing government is deficits, which are very large today and will be even bigger in the near future as more and more baby boomers retire and push up costs for Social Security, Medicare, and Medicaid.

Our side (broadly speaking) wants to solve the budgetary situation by restraining the growth of government. One proposed solution is Congressman Paul Ryan’s Roadmap plan, which would reform entitlements and curtail other programs so that the long-term burden of federal spending is reduced to less than 20 percent of GDP. Since long-term federal tax revenues under current law – even if the 2001 and 2003 tax cuts are made permanent – are expected to be about 19 percent of GDP, this solves the budet problem  (the tax reform component of the Roadmap includes a VAT, which is a poison pill in an otherwise excellent plan, but let’s set that aside for another day).

The left, by contrast, generally wants to let federal spending consume ever-larger shares of economic output, and they believe that increasing the tax burden is the right way of keeping the deficit from getting too large. No statist has put forth a detailed plan to match Rep. Ryan, but several high-ranking Democrats have made no secret about their desire for a VAT (see here, here, and here). And everyone agrees that a VAT is capable of extracting a lot of money from the productive sector of the economy.

These two visions are fundamentally incompatible, which helps to explain why there is a standoff. The bad guys do not want to control the size of government and the good guys do not want to raise taxes. But now we have to add one more piece to the puzzle. While gridlock normally is a good result, inaction to some degree favors the other side because entitlement programs automatically expand. The helps to explain why Tyler (with reluctance) thinks that it may be best to acquiesce to a VAT now rather than to wait for a fiscal crisis.

Now let’s explain why Tyler is wrong. First, it is far from clear that surrendering to a VAT now will result in better (less worse) policy than what will happen during a crisis. It certainly is true that some past crises have led to terrible policy, such as the failed policies of Hoover and Roosevelt in the 1930s or the more recent Bush-Paulson-Obama-Geithner TARP debacle. But at other points in time, a crisis atmosphere has paved the way for better policy, with Reagan’s presidency being the most obvious example.

The wait-for-a-crisis strategy clearly is a bit of a gamble, but even if we lose, we get a VAT in the future rather than a VAT today. So what’s the downside? Tyler and others might say that the future legislation in the midst of a crisis could be a vehicle for other bad provisions, but he offers no evidence for this proposition. And it may be the case that the other side would be forced to add good provisions instead. Moreover, the lack of a VAT in the period between today and the future crisis might help lead to some much-needed spending restraint.

What about Tyler’s argument that the good guys could extract some concessions from the other side by putting a VAT on the table. This is horribly naive. Even though George Mason University is less than 20 miles from Washington, and even though Tyler is a renassaince man with many talents, he does not understand how Washington really works.

Imagine there is a budget summit where politicians from both sides get together to work on this supposed deal. Here are the inevitable ground rules – and the consequences they will produce:

1. The deal will be 50 percent spending cuts and 50 percent tax increases, but the supposed spending “cuts” will be nothing more than reductions in already-legislated increases. The tax increases, by contrast, will be on top of all the additional revenue that is already exepected under current law (not a trivial matter since receipts will be $1.5 trillion higher in 2015 than they are today according to OMB). For proponents of limited government, using the “current services baseline” as a benchmark in budget negotiations is like playing a five-minute basketball game after spotting the other team a 20-point lead.

2. All spending and revenue decisions will be examined through the prism of CBO income distribution tables, and the left will successfully insist that nothing is done to make the tax code less progressive. But since a VAT is a proportional tax, the only way of preserving overall progressivity is to raise tax rates on those wicked and evil rich people and/or to massively increase “refundable” tax credits (what normal people call income redistribution). Any proposal to lower income tax rates or eliminate the corporate income tax, as Tyler envisions, would be laughed out of the room (though Democrats will offer a fig leaf or two in order to seduce a sufficient number of gullible Republicans into supporting a terrible agreement, and that might include a cosmetic change to the corporate tax regime).

3. Many of the supposed spending cuts, for all intents and purposes, will be back-door tax increases on saving and investment. More specifically, a big chunk of the supposed spending cut portion of a budget deal will be from means-testing entitlement programs. This sounds good. After all, who wants to send a Social Security check to Bill Gates when he retires? But consider how such a system actually will work. The government will say that people with income (and/or assets) above a certain level are ineligible for some or all of the benefits available to less-fortunate retirees. From an economic persepective, this is very much akin to a higher tax rate on people who save and invest during their working years. And since means testing would only generate substantial budgetary savings if it applied to millions of regular people in addition to Bill Gates, we would wind up with a system that created big penalties on middle-class families that were dumb enough to save and invest.

I’ve already pontificated enough for one blog post, so let me summarize by stating that Tyler’s approach, while not unreasonable, is about how to lose gracefully. Even if his strategy works perfectly, the result is bigger government. I’d much rather fight. If you want some inspiration for the battle, watch this video. If you haven’t had enough of me already, here’s my video explaining why the VAT is a horrible idea.

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Even though the American people don’t want government-run healthcare, and even though Democrats are very nervous after losing a supposedly-safe Senate seat in Massachusetts, Obamacare is not dead. The Democrats still have huge majorities in the House and Senate and the White House clearly is trying to put the GOP back on the defensive. Exhibit A is the President’s invitation for a televised healthcare summit on February 25. Exhibit B is the fact that the Congressional Budget Office has greased the skids by concocting preposterous estimates that government-run healthcare will reduce the budget deficit. This may seem like meaningless wonkery, but it could allow the Democrats to use the “reconciliation” process to impose Obamacare with just 51 votes in the Senate. Here are two reminders of why it is utterly absurd to think that a giant new entitlement program will reduce red. First, we have an excerpt from a Wall Street Journal column about how the “cost curve” is bending up rather than down. Second, we have a Center for Freedom and Prosperity video that looks at the evidence confirming that government-run healthcare will be a budget buster:

Richard Foster, the chief actuary for the Centers for Medicare and Medicaid Services, reports that under his analysis national health spending will rise under the bills by $222 billion over the next 10 years. In other words, ObamaCare really does “bend the cost curve”—up. Even that estimate exists only on paper, as Mr. Foster has the honesty to admit. Because “most of the coverage provisions would be in effect for only six of the 10 years of the budget period, the cost estimates shown in this memorandum do not represent a full 10-year cost for the proposed legislation,” he writes. The report is punctuated by phrases like “unrealistic” and “doubtful,” and Mr. Foster adds that “the scope and magnitude of these changes are such that few precedents exist for use in estimation.” …ObamaCare is “paid for” only in the sense that Medicare’s payments to doctors are assumed in the bill to be cut by more than 20% this spring and even deeper after that, which will never happen in practice. …As for the White House’s promise that it will reduce health spending painlessly by cutting “waste,” Mr. Foster isn’t buying it. He writes that “we find the language as it now reads is not sufficiently specific to provide estimates.” The report also calls out the new entitlement program for long-term care, which is included only because it will start collecting premiums five years before it starts paying benefits. In return for this accounting gimmick, the fisc will be saddled with a program that Mr. Foster estimates will be bankrupt by 2025.

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This video provides 12 reasons in less than 7 minutes.

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The indispensable editorial page of the Wall Street Journal blasts the phony spending “cuts” that are supposed to offset some of the new spending in the Senate health care bill. Sadly, the Congressional Budget Office has compromised its independence to help the left foist a fiscal fraud on the nation:

Washington spent the week waiting for the Congressional Budget Office to roll in with its new cost estimates of the Senate health-care bill, and what a carnival. Behold: a new $829 billion entitlement that will subsidize insurance for tens of millions of people—and reduce deficits by $81 billion at the same time. In the next tent, see the mermaid and a two-headed cow. …The irony is that the CBO’s guesstimate exposes the fraudulence and fiscal sleight-of-hand underlying this whole exercise. Anyone who reads beyond the top-line numbers will find that the bill creates massive new spending commitments that will inevitably explode over time, and that this is “paid for” with huge tax increases plus phantom spending cuts that will never happen in practice. …Liberals are demanding heftier subsidies, and once people see the deal their neighbors are getting on “free” health care, they too will want in. Even CBO seems to find this unrealistic, noting “These projections assume that the proposals are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation.” Scratch “often.” Then there are the many budget gimmicks. Take the “failsafe budgeting mechanism” that would require automatic cuts in exchange spending if it increases the deficit. CBO expects 15% reductions in exchange subsidies each year from 2015 to 2018, even though the exchanges don’t open until 2014. That kind of re-gifting should have been laughed out of the committee room, but the ruse helps to move future spending off the current budget “score.” Mr. Baucus spends $10.9 billion to eliminate the scheduled Medicare cuts to physician payments—but only for next year. In 2011, he assumes they’ll be reduced by 25%, with even deeper cuts later. Congress has overridden this “sustainable growth rate” every year since 2003 and will continue to do so because deeper cuts in Medicare’s price controls will cause many doctors to quit the program. Fixing this alone would add $245 billion to the bill’s costs, according to an earlier CBO estimate. The Baucus bill also expands ailing Medicaid by $345 billion—even as it busts state budgets by imposing an additional $33 billion unfunded mandate. …the bill piles on new taxes, albeit on health-care businesses so the costs are hidden from customers. Insurance companies offering policies that cost more than $8,000 for individuals and $21,000 for families will pay $201 billion per a 40% excise tax, which will be passed down to all policy holders in higher premiums. Another $180 billion will hit the likes of drug and device makers, including $29 billion because companies won’t be allowed to deduct these “fees” from their corporate income taxes. Then there’s the $4 billion in penalty payments on those who don’t buy insurance because all of ObamaCare’s other new taxes and mandates have made it more expensive.

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