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.
For a follow-up study, let's examine what effect high-cost government studies that frequently contradict each other and admittedly depend on your starting "assumptions" have on the economy.
To my knowledge, NO reporter has ever properly explained the Laffer Curve. For the curve to "work" the ECONOMY AS A WHOLE does NOT have to grow or be "stimulated." SOME tax rates might be at the point where they are collecting the most revenue, while other rates may be higher than that point. Thus, for the curve to "work," it isn't necessary for the economy to grow, it is only necessary to cut the rates that are too high. Revenue will increase instantly. The economy WILL grow, and revenues will increase as a result of that, too.
You can always tell a reporter who hasn't bothered to think about the issue, and who understands that a tax rate is a price, charged by the government. Reporters who don't think always just spew out well-worn phrases like "stimulate the economy," etc.
My first thought exactly.
I will wait for a more credible analysis.
Not that any analysis matters anyway, since the confiscation of money from the people who earn it, and the subsequent spending of that money by the scumbag Democrats to buy the votes of society's parasites, is immoral on its face.
The private sector is held accountable with profit goals and competition. If they don't perform they don't survive. They cannot force the public to pay for their failures.
Every dollar in the govermnet system, spent on things other than what government should be doing -- like keeping the peace -- is going to partially be squandered. Because of its political nature it can't work. Imagine if businesses were run like the gov't.
Additionally, every dollar that goes to the government rather than the private sector represents lost freedom. We are only free to the point that we control our own circumstances. When the government takes our earnings against our will that's not freedom. If I pay 40% of my earnings to the government then I am 60% free. So the one effect tax cuts will always have is the rise of personal freedom and the lowering of government control. Put a price value on that.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.