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How D.C. number crunchers make bad tax cuts look good

Speaker of the House Paul D. Ryan (R-Wis.). (Scott Applewhite/AP)

From the department of completely predictable problems that we brought upon ourselves, certain tax and budget analysts are using “dynamic scoring” to generate implausible results about the extent to which big tax cuts will generate growth that will in turn pay for those tax cuts. In other words, there’s a new disease in town: dynamic scoring abuse. In a world where both candidate Donald Trump and House Republicans are pushing big revenue-losing tax plans, there’s a real risk this illness could spread.

When a tax change is proposed, various analysts around D.C. “score” the change, meaning they estimate its impact on revenues and thus on the budget surplus or deficit, which is just revenues minus spending. There are two approaches to such scores: “conventional” and “dynamic.” Conventional, or “static,” scores incorporate some behavioral changes (which is why the “static” label often applied to them isn’t quite right), such as smoking less if a cigarette tax goes up, but unlike dynamic scores, they don’t include the estimated macro-feedback impacts on growth, investments, jobs and, ultimately, revenues that allegedly at least partially offset the costs of tax cuts.

Speaker Paul D. Ryan (Wis.) and the House Republicans just released a new tax plan that the D.C.-based Tax Foundation (TF) scored as losing $2.4 trillion over 10 years, mostly to benefit wealthy households and multinational corporations. Based on our aging population alone, which will require more spending on Social Security and Medicare, that’s really reckless budgeting. But when TF revs up its magic dynamic scoring machine, that $2.4 trillion loss falls to $191 billion (I would have rounded to $190 billion, but these guys have a sense of humor).

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How does the GOP tax cut pay for 92 percent of itself? Good question, sort of. That is, we can try to get into the guts of the model and figure out what they did to get it to spit out such huge offset effects, but before that, it’s really important to stop and do a reality check. Perhaps I lack imagination, but based on other analyses I’ve seen on the macroeconomic effects of tax cuts, common sense, and the history of such promises around supply-side tax cuts like this, I find the magnitude of this estimate inconceivable.

On that last point alone (past supply-side claims), how many times do we have to go through this foolishness? The Reagan and Bush tax cuts hemorrhaged revenue, and the Clinton and Obama tax increases on rich folks raised billions. I’ve looked under every rock I could find for correlations of supply-side effects, and I come up empty. Ever since some waiter made the mistake of giving Art Laffer a napkin to draw on, this supply-side crowd has been wrong. The most recent exhibit is ongoing in Kansas, where, after Laffer and Stephen Moore of the Heritage Foundation predicted that tax cuts would provide an “immediate and lasting boost” to the economy, those cuts blew a massive hole in the state budget, a hole accompanied by none of the advertised growth effects.

Moore (who is apparently “Trump’s senior economic adviser”) now argues, according to an article in Yahoo Finance, “that with dynamic scoring, he’s been able to get the cost of Trump’s tax cuts down to about $200 billion a year. Assuming the new Trump plan costs about a third of the original, than means Moore calculates the tax plan will spur enough economic growth to throw back an extra $100 billion to the U.S. Treasury. Those numbers are very squishy.”

Squishy, indeed.

One thing that seems to be going on here is that the TF’s model really pumps up the impact of the House plan’s lower corporate tax rate and full expensing (immediate, full deduction) of capital investment on investment levels and the economy. Such investment grows 28 percent as a result of these cuts over the “long-run” in their model, an extremely “dynamic” score. They’ve judged in other work that the growth effects from full expensing will save 59 percent of its 10-year cost. Analyses of similar ideas by more established, official agencies, like the Joint Committee on Taxation, get results that are nowhere near this large.

In fact, in the Congressional Budget Office’s and JCT’s analyses, these types of proposals don’t just generate growth plus-ups based on lower tax rates or capital costs. They also, when they’re not paid for, generate larger budget deficits that crowd out private borrowing, raise interest rates and thus hurt investment. As my Center on Budget and Policy Priorities colleague Chye-Ching Huang notes, “JCT’s analysis of permanent bonus depreciation concluded that in the second and third decade, due to deficits and crowding out, it’s impossible to tell whether counting macroeconomic effects even reduces or increases the cost of the proposal.” The TF model, in effect, assumes away such potential negative impacts.

Let’s get real, folks. Big tax plans surely affect economies and behavior — labor supply, investment, spending — in all kinds of ways, and there’s nothing inherently wrong with estimating such feedback effects. But we must recognize the considerable uncertainty of such guesstimates, and even more so, the temptation by politically motivated analysts to place many thumbs on the scale.

If we want to contain the virus of dynamic scoring abuse, we’ll all — and I include the media here, who too often uncritically report these numbers — need to make sure our BS meters are fully charged and ready to go. We’re gonna need ’em.

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