The week leading up to Congress's adjournment usually offers C-SPAN viewers a few treats, but this year's Best Irony in a Floor Speech Award should go to Senate Majority Leader George Mitchell, the commanding general in the Democratic Party's class war, for his eloquent support of a resolution in favor of repealing the excise tax on yachts.
"Whatever may have been the theoretical reason for advancing {the boat tax} . . . it has proven in its implementation not to have worked as intended," Mitchell said, "in behalf of the many thousands of people in my state and in other states who have been adversely affected."
The majority leader wasn't talking about thousands of adversely affected rich people, but blue-collar boat builders who've lost their jobs because the so-called "luxury" tax on boats has resulted in slumping sales beyond what could be expected in a recession. Other advocates of the luxury tax repeal resolution cited a July Joint Economic Committee Republican study which demonstrated that the luxury tax would result in the elimination of 9,400 jobs in the boat, aircraft and jewelry industries and would actually end up losing revenue.
Despite Michael Kinsley's errant assertion on these pages awhile back, I never represented this study as a "comprehensive dynamic analysis." In fact, my introduction specifically states, "A comprehensive dynamic analysis would include the impact on state and local treasuries, lost corporate taxes due to lower profits, reduced capital investment, employment effects in related industries, the impact of laid-off workers returning to work at lower wages and less productive jobs, and the cost of enforcing the tax, among others . . . This study of direct employment effects examines only one elemental aspect of the luxury taxes' impact."
The point of the JEC Republican study was that Congress should consider a tax's economic impact prior to its enactment. Kinsley never disputes the job loss resulting from the imposition of new luxury taxes, only that we don't assume that an equal number of jobs will somehow appear instantaneously elsewhere in the economy, supposedly "a flaw that makes the {JEC} study worthless." Kinsley fails to note that the JEC study narrowly measured frictional unemployment that assumes reemployment after four months, the average duration of unemployment for skilled, blue-collar workers.
To a certain extent, he is correct that "when wealthy people are deterred from buying expensive jewelry or fancy cars and boats, the money doesn't just disappear" but "gets spent on something else or it gets saved." Perhaps the person who did not buy a boat because of the tax bought a house at the beach instead (though he more likely bought a foreign-made boat, increasing the number of jobs in the Bahamas), and the pilot who put off a new plane purchase flew American Airlines a few more times, and a few wealthy women put $20,000 in savings rather than buy a diamond ring (though they just as likely bought a similar diamond in France while enjoying a vacation).
However, a scattershot spending pattern throughout the world does not result in employment gains to Americans that offset the rifle-shot effect the tax has had on the U.S. plane, boat, jewelry and luxury auto industries.
To the extent that substitute spending does eventually lead to other jobs, one must question how and why the federal government determines that the resort realtor's job or the Bahaman boat builder's job is more important than the blue-collar American boat builder's or that the flight attendant's job is more important than the one on the Beech Aircraft assembly line. And even if all the wealthy people who deferred the purchase of a luxury good put their money in savings instead, the impact on capital markets would still be insignificant.
Kinsley and others who favor static tax analysis see the economy as a finite pie to be cut and distributed. They fail to understand that taxes affect the size of the pie, that tax incentives like a preferential capital gains rate make the pie grow and $165 billion in new taxes like those contained in the last budget deal make the pie shrink.
By ignoring such real economic effects, government budget forecasters consistently overestimate the revenue gain from a tax increase while discounting the economic growth generated by a tax cut. Since government spending is based not on actual receipts but on projected revenue, the Congressional Budget Office and the Office of Management and Budget must constantly adjust their deficit projections upward, with the latest "technical reestimate" lowering revenue projections (and thus raising deficit projections) by $129 billion over five years.
In 1989, Sen. Bob Packwood (R-Ore.) asked the Joint Committee on Taxation to estimate how much money the federal government could raise if all those who earned $200,000 or more had their income taxed at a 100 percent rate, and was informed that such a tax would generate $204 billion in 1990, rising to $299 billion through 1993.
The startled Packwood then asked the JCT, "Do you mean to tell me that even at a 100 percent tax rate you think we will keep getting these increased quantities of money." The committee responded that its revenue projections do not take into account any behavioral response. In other words, said Packwood, the JCT assumes people "will work forever and pay all of their money to the government, when clearly anyone in their right mind will not."
Government forecasts are close enough for government work, seems to be the message. If a freshman in Economics 101 were to assume in a paper that GNP will remain constant no matter what the level and incidence of taxation, he'd be flunked. But government revenue estimators stubbornly cling to this methodology in the face of towering deficits.
The Democrats should face it; the luxury tax backfired. They wanted to "soak the rich," and they ended up drowning blue-collar workers in a wave of unemployment. It's not even a net revenue gainer. We should learn from the mistake of the luxury tax's enactment and in the future take into account a proposed tax's economic effects before passing it.
The writer, a Republican representative from Texas, is ranking Republican on the Joint Economic Committee.