Wednesday, March 18, 2015

Tax Cuts and Dynamic Scoring, or, Modeling vs. History

Lots of chatter this winter about the “dynamic scoring” of tax bills in Congress. Republicans insist that ordinary accounting of tax bills is wrong, because cutting taxes spurs economic growth, which leads to more tax revenue. But how to estimate this effect? Both politicians and economists are fixated on economic modeling as the right tool. Thus the Tax Foundation just released a report arguing that the immense tax cuts proposed by Senators Marco Rubio and Mike Lee would more than pay for themselves, because they would add 15 percent to gross domestic product and 13 percent to wages. The craziest part of this calculation is the Tax Foundation's estimate that
Rubio-Lee would add nearly 50 percent to the business capital stock inside a decade, over and above how much it would have grown absent any change in tax cuts. In other words, if businesses would own two of something under current policy — airplanes, buildings, machines, whatever — they would, on average, go out and buy a third one because of the investment tax cuts in Rubio-Lee.
Madness, say other economists, who counter with their own models showing much smaller effects.

But why are we using models at all? We don't need economic models to estimate the effect of tax cuts on the economy, because we have good data showing these relationships going back to World War II, not just for the US but for dozens of other countries. What does that data show?
“Tax rate cuts in the past have not spurred much if any growth,” said William Gale, co-director at the Urban-Brookings Tax Policy Center and a former staff member at the Council of Economic Advisers under George H.W. Bush.
And there you have it. Why are we arguing about models when we have the data, and it shows no consistent effect? Why is it “conservative” to rely on ideologically charged predictions about the future instead of the actual record of the past?


G. Verloren said...

"Why are we arguing about models when we have the data, and it shows no consistent effect? Why is it “conservative” to rely on ideologically charged predictions about the future instead of the actual record of the past?"

In my eyes, the problem is that many "Conservatives" are only concerned with concerving things that are to their own personal benefit, and are happy to change things that aren't.

Hence why, for example, huge numbers of conservatives who trace their ancestry directly to foreign immigrants are deeply against foreign immigration. They want tighter controls and crackdowns on "illegals", despite directly benefiting from the fact that their ancestors immigrated to America during ages when immigration had little to no restrictions, and those same ancestors would today be unable to enter the country legally.

Its the same with taxation - the people who have the most money and power want to keep things that way. So they're more than happy to push for change in the form of lowered taxes that benefit them, but they resist tooth and nail any hint of taxes being raised back up again.

G. Verloren said...

Of course, there are plenty of poor Conservatives as well, operating on a similar flawed bit of logic.

Naturally more taxes on the poor hurts their ability to make ends meet, so it is almost instinctively resisted. The problem is that taxes are what pays for government services, and people are notoriously bad about undervaluing the benefits they receive from those services. They want all the benefits of a well funded government, but they refuse to chip in more to help pay for it - even when the return on value is phenomenally good.

The trouble is that their political leaders prey upon their economic situation. We have billionaires going around saying to the poorest people in the country, "You hate taxes? What a coincidence - so do I! The government is trying to steal our hard earned money! Why do they need all that money anyways? Vote for me, and I'll slash taxes! ...And also the services they fund, but you folks aren't Socialists, right? You don't need hand-outs! You're the salt of the earth! Independant mavericks who work hard and don't need a nanny-state to meddle in your affairs!"