Saturday, October 10, 2015

Ezra Klein on "Dynamic Scoring" of Tax Cuts

Ezra Klein details how even conservative economists blow the whistle on "dynamic scoring" making tax cuts pay for themselves on

Conservative policymaking is caught in a trilemma: Conservatives want to lower taxes, they want to balance the budget, and big spending cuts are unpopular. But there's no way to balance the budget while cutting taxes and only cutting popular spending.

Among responsible policymakers, that trilemma leads to hard trade-offs. Among irresponsible policymakers, it leads to the magic of dynamic scoring.

The basic idea here is that massive tax cuts boost growth so much that they pay for themselves, and so there's no actual trade-off between lower taxes and balanced budgets. In this telling, eating your cake leads your body to burn calories so fast that it's like you end up thinner than you started!

Basically no serious economists believe this. Careful efforts to quantify whether tax cuts boost growth have led to estimates that they have a modest negative effect, a modest positive effect, or not much effect at all, depending on what assumptions you use. (Gregory) Mankiw, the former Bush adviser, described the idea that cuts boost growth so much that they pay for themselves as the province of "cranks and charlatans" in his economic textbook.

At various times Republicans have tried to stock the government with cranks and charlatans who will tell them what they want to hear, but it's never really worked out. In 2003, for instance, they installed Douglas Holtz-Eakin as the new director of the Congressional Budget Office and asked him to dynamically score the Bush tax cuts. The Wall Street Journal records the disappointing 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.
Of the nine models Holtz-Eakin tried, only two showed much improvement in the deficit — and both of those models assumed taxes would be raised after 2013 to eliminate the deficit, so "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."

But Washington has plenty of not-very-serious economists who work outside the government who are happy to provide air cover to tax-cutting Republicans. And Rubio went out and found himself some.

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