By Nell Henderson
Washington Post Staff Writer
Saturday, February 11, 2006
Vice President Cheney said Thursday night that the verdict is in before the Bush administration's new tax analysis shop has even opened for business: Tax cuts boost federal government revenue.
That assertion won applause from his audience at the Conservative Political Action Conference, but it is a long-standing source of debate among many economists and tax experts at a time of rising federal budget deficits.
Cheney touted President Bush's recently announced proposal to create a tax analysis division as a move toward providing more evidence for the administration's side of the argument.
"The president's tax policies have strengthened the economy, as we knew they would," Cheney told the conference, according to a text posted on the White House's Web site. "And despite forecasts to the contrary, the tax cuts have translated into higher federal revenues."
Cheney said some forecasters have underestimated the degree to which tax cuts would stimulate economic growth and tax revenue.
"It's time to reexamine our assumptions and to consider using more dynamic analysis to measure the true impact of tax cuts on the American economy," Cheney said, explaining why Bush has proposed the new Treasury Department division. "The evidence is in, it's time for everyone to admit that sensible tax cuts increase economic growth and add to the federal treasury."
Bush's proposal, unveiled in his budget plan last week, comes as he is pushing Congress to make permanent the recent tax cuts that are scheduled to expire in coming years. The nonpartisan Congressional Budget Office predicted last month that the budget deficit would swell to $337 billion this year and that the red ink would end in 2012 only if the tax cuts were allowed to expire.
Treasury officials said yesterday that the president's proposed Division on Dynamic Analysis -- with a handful of employees and a $513,000 budget -- would go beyond the government's old "static" methods of analyzing proposed changes in tax policy only in terms of their direct effects on certain affected taxpayers. Instead, "dynamic" analysis looks at how tax changes cause consumers and businesses to behave differently in ways that affect the overall economy's growth.
For example, a tax break to encourage business investment might lower some individual companies' tax bills -- looking like a hit to Treasury revenue under a static analysis. But if that tax cut caused businesses to buy more equipment, hire more workers and increase profits, that might contribute to stronger overall economic growth -- causing the employees and companies to pay more in income, sales and other taxes over time.
Treasury officials said yesterday that they would not initially use their dynamic analysis for "scoring," or estimating the effects of tax changes on the government's tax receipts. But the department said in a statement: "It is envisioned that dynamic analysis eventually would evolve into dynamic scoring . . . (maybe within a year or two)."
Some tax-cut proponents contend that tax cuts can essentially pay for themselves by spurring such strong economic growth that the additional tax revenue more than offsets the money lost to the cuts.
Many economists dispute that, arguing that the effects of tax cuts depend on how they are structured, on economic circumstances and on many other variables.
"All economists agree tax policy has an effect on the economy. The hard thing is to figure out how to measure these effects in the real world," said Leonard E. Burman, co-director of the Urban Institute-Brookings Institution Tax Policy Center.
Both Congress's Joint Committee on Taxation and the CBO provide dynamic analyses of how tax changes are likely to affect the larger economy, but they do not use dynamic scoring in the budget process.
"I am a proponent of doing this," said Douglas Holtz-Eakin, a fellow at the Council on Foreign Relations who introduced dynamic analysis while he was CBO director.
But, he added, because of the challenges of developing good models and the difficulty of the findings, "there are limits to how useful it is as a policy tool."