FOR YEARS, tax-cut aficionados have argued that the green-eyeshade crowd underestimates the benefits of tax cuts by measuring only the costs. They say the nonpartisan Congressional Budget Office should include in its analyses extra revenue that would be generated by economic growth stimulated by, yes, the tax cuts.
Now the CBO has tried it their way -- and the administration's contention that the country will magically "grow its way" out of deficits as it cuts taxes still turns out to be more or less a fairy tale. The CBO, headed by new director Douglas Holtz-Eakin, who arrived straight from the White House Council of Economic Advisers, analyzed President Bush's tax and spending proposals using various models to forecast the overall effect on the economy. The report -- the CBO's first foray into dynamic analysis -- showed "small" supply-side effects, "either positive or negative," from Mr. Bush's budget. Its models indicated that the proposals would raise -- or, in most scenarios, lower -- economic growth by less than a percentage point on average in the next 10 years.
This is significant, because the administration has suggested that the tax package would pay for itself, at least in part, by spurring productivity. The proponents of dynamic scoring argue that the standard, "static" analysis -- by ignoring the boost to the economy -- overstates the true cost of the cuts. The Heritage Foundation, for example, figures that greater economic growth would recoup about 56 percent of the cost of the administration's $726 billion "jobs and growth" package.
A few weeks back, using its conventional approach, the CBO projected that the president's budget would add $2.7 trillion to the deficit through 2013. Now it has offered seven dynamic scenarios, and four showed deficits even bigger than that -- as high as $3 trillion under one approach. Three others showed smaller deficits, but the smallest was $2.3 trillion, and those models all assumed that taxes would have to be raised permanently in 2014 by more than $200 billion in order to finance the preceding 10 years of higher deficits. As Rep. Chet Edwards (D-Tex.) put it, "This analysis is bad news for the free lunch philosophy." Rep. Gil Gutknecht (R-Minn.), a proponent of dynamic scoring, pronounced himself "somewhat surprised and humbled that your model doesn't give us better news than we had hoped for."
Proponents of big tax cuts and dynamic scoring now argue that the CBO should have looked at the tax package in isolation. They say other aspects of the budget -- increased spending and tax measures designed for social purposes, such as health care credits -- reduce the positive effect of the tax cuts. But it would be odd for the CBO to consider some parts of the president's proposal and ignore others. More fundamentally, the impact of tax cuts depends in part on how they are financed. Given that the president isn't suggesting cutting spending to pay for the cuts, it seems only fair to take into account the economic drag of higher deficits.
Meanwhile, the Treasury Department is preparing to release a study showing that 30 percent to 40 percent of the cost of the tax package would be recouped by higher economic growth. And a new House rule requires Congress's Joint Tax Committee to dynamically score tax cuts. The CBO's analysis will be far from the last word on dynamic scoring, but it's a useful -- and chastening -- start.