The Left’s Position on the Laffer Curve and Dynamic Scoring: Being Exactly Wrong Is Better than Being Inexactly Right
January 4, 2015 by Dan Mitchell
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.
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.
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.
* 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.
A Lesson on the Laffer Curve for Barack ObamaIn “Class warfare”
The Joint Committee on Taxation’s Voodoo EconomicsIn “Economics”
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