Monday, April 24, 2017 3:36:57 AM
Tax Cuts Still Don’t Pay for Themselves
"Using it to argue lower taxes today, debunked comprehensively"
Josh Barro @jbarro MARCH 17, 2015
Stephen Savage
Last week, I wrote about the new tax plan from Senator Marco Rubio .. http://www.nytimes.com/interactive/2015/04/14/us/elections/marco-rubio.html?inline=nyt-per .. and Senator Mike Lee as the “Puppies and Rainbows Tax Plan,” because it’s a plan that includes something for everyone. It calls for big tax credits for middle-income families with children, corporate tax cuts and complete elimination of the capital gains tax — and as a result would cost trillions of dollars in revenue over a decade.
Or would it?
The Tax Foundation released a report .. http://taxfoundation.org/article/economic-effects-rubio-lee-tax-reform-plan .. last week arguing the Rubio-Lee plan would generate so much business investment that, within a decade, federal tax receipts would be higher than if taxes hadn’t been cut at all. According to William McBride, the chief economist at the right-of-center think tank, the senators’ plan would add 15 percent to gross domestic product and 13 percent to wages.
If that sounds aggressive to you, you’re not alone: I discussed the Tax Foundation report with 10 public finance economists ranging across the ideological spectrum, all of whom said its estimates of the economic effects of tax cuts were too aggressive. “This would not pass muster as an undergraduate’s model at a top university,” said Laurence Kotlikoff, a Boston University professor whom the Tax Foundation specifically encouraged me to call.
Of course, a lot of flawed think tank reports are released every year. This one matters because the House adopted a rule in January .. http://www.bna.com/house-adopts-dynamic-n17179921893/ .. that requires “dynamic scoring” of tax bills: analyses (such as the Tax Foundation’s) that give legislation credit for its likely macroeconomic effects, including any rise in tax receipts due to economic growth.
In principle, dynamic scoring is fine. Tax policy really does affect the economy, and the right tax policies can produce economic growth that increases the amount of taxable income. But as the Tax Foundation report shows, dynamic scoring can be misused: You can get essentially any answer you want out of a dynamic tax model by changing the assumptions about economic behavior that you plug into it. If you turn the dials far enough, you’ll get a report that shows a tax cut will pay for itself, even if it won’t.
The key question is, will the Congressional Budget Office .. http://topics.nytimes.com/top/reference/timestopics/organizations/c/congressional_budget_office/index.html?inline=nyt-org , implementing dynamic scoring under new leadership chosen by Republicans, be more responsible than the Tax Foundation and other conservative think tanks in choosing its assumptions?
(I should note, in the interest of disclosure, that I worked at the Tax Foundation for about a year, from 2008 to 2009. I maintain a cordial relationship with the staff there, or at least I did at the time this article was filed. I never worked with Mr. McBride.)
The models that get conservatives excited about dynamic scoring often cause such excitement because their aggressive assumptions lead to implausibly rosy results. In 2011, the Heritage Foundation put out a report finding that Paul Ryan’s budget plan, which called for sharp cuts in taxes and spending, would have caused unemployment to stabilize below 3 percent. After various observers pointed out this was implausible, Heritage revised its model .. http://www.slate.com/articles/business/moneybox/2011/04/model_misbehavior.html .. to call for a higher unemployment rate — without changing its strongly positive findings about other economic indicators, such as G.D.P., that should be affected by unemployment.
In the case of the Tax Foundation, the optimistic results come mostly from assumptions about business investment being wildly responsive to tax policy. Its report found 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.
The Republican senators Mike Lee, left, and Marco Rubio before a news conference March 4 to introduce their proposal for an overhaul of the tax code. Credit Drew Angerer/Getty Images
You might think a cut in taxes on investment would increase returns to investors in the long run. But the Tax Foundation’s model says that isn’t so — instead, it assumes investment would rise as much as was necessary to bid down pretax returns so that aftertax returns were unchanged. For example, automakers would pay a lower tax rate, but they’d make more cars, flooding the market until profit margins fell enough to fully offset the benefits of the tax cut. This assumption is how the Tax Foundation reaches the conclusion that Rubio-Lee would drive an enormous increase in investment.
This assumption led various economists to invoke the names of small islands.
“That’s true for the Netherlands Antilles, it’s not true for us,” said Doug Holtz-Eakin, the former head of the Congressional Budget Office who was John McCain’s top economic adviser during his 2008 campaign.
“It’s a model that might be appropriate for Bermuda,” Mr. Kotlikoff said.
In a very small, very open economy, the Tax Foundation might be right: Cuts in investment taxes would drive a flood of foreign capital, producing a huge percentage increase in investment. But the United States is simply too big for that to work. The U.S. economy also is not perfectly open; for example, we have some restrictions on trade. Therefore, estimates of the amount of investment created by investment tax cuts should be more modest. Economists also criticized the Tax Foundation model for assuming all that new investment would fall into place very rapidly, and for failing to address economic effects from spending cuts or increased borrowing that the tax cuts would require in their first years.
To be clear, Senator Rubio and Senator Lee have not claimed their tax plan would pay for itself. Mr. Rubio was quoted in Bloomberg as saying, “I’ve never believed that tax reform by itself should pay for itself.” While the Congressional Budget Office has not used dynamic scoring as the basis for official cost estimates in the past, it has provided informational estimates of major fiscal proposals’ effects on the economy, showing considerably more modest effects than the Tax Foundation finds, and with a significant range of uncertainty around those estimates.
For example, to estimate how tax cuts affect the economy, you need to estimate how much more people will work if you cut their taxes. The C.B.O.’s “central” estimate of this effect is about two-thirds what the Tax Foundation assumes, but it provides a range of possible effects, from close to zero to approximately as large as the Tax Foundation says. While some answers about how taxes affect the economy are wrong (as discussed above, the Tax Foundation’s estimates of taxes’ effects on capital are well outside the consensus range), there is no single answer about any parameter that is known to be right.
“I worry that, if they decide one way to do a dynamic score, it will seem to some people that has settled the debate over the likely economic effect,” Joel Slemrod, a public finance economist at the University of Michigan, said of the Congressional Budget Office. “You can’t say anything definitive.”
But if dynamic scoring is to serve as the basis for legislation — and for determinations of whether legislation increases the budget deficit or not — Congress is going to have to pick a point within the range of estimates to rely on. In fact, it already does that by using a static score, which is the same as assuming the macroeconomic effect of tax changes is zero. A zero assumption is wrong, but it is not necessarily that wrong. Some economists I spoke with thought Rubio-Lee would generate substantial economic gains, even if they were not as substantial as the Tax Foundation estimates; others thought any gains would be small.
“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.
The crucial thing to watch, in the guts of future C.B.O. reports that rely on dynamic scoring, will be whether the new dynamic assumptions are more reasonable than zero — or whether, like the Tax Foundation assumptions, they take us farther away from accuracy, and make unsupportable promises of tax cuts paying for themselves.
https://www.nytimes.com/2015/03/17/upshot/tax-cuts-still-dont-pay-for-themselves.html?_r=0
--
The Laffer Swerve
April 10, 2015 10:03 am April 10, 2015 10:03 am
Credit Congressional Budget Office
Jim Tankersley has a good article on Arthur Laffer’s never-stronger influence on the Republican party .. http://www.washingtonpost.com/business/economy/arthur-laffer-has-a-neverending-supply-of-supply-side-plans-for-gop/2015/04/09/04c61440-dec1-11e4-a1b8-2ed88bc190d2_story.html , with just one seriously misleading statement:
-
Laffer’s ideas have also grown out of fashion with much of the mainstream economic community. There is an entire branch of economic literature that uses detailed equations to show cutting top tax rates does not spark additional growth.
-
No, Laffer hasn’t “grown out of fashion” with mainstream economics — he was never in fashion. There was never any evidence to support strong supply-side claims about the marvels of tax cuts and the horrors of tax increases; even freshwater macroeconomists, despite their willingness to believe foolish things, never went down that road.
And nothing in the experience of the past 35 years has made Lafferism any more credible. Since the 1970s there have been four big changes in the effective tax rate on the top 1 percent: the Reagan cut, the Clinton hike, the Bush cut, and the Obama hike. Republicans are fixated on the boom that followed the 1981 tax cut (which had much more to do with monetary policy, but never mind). But they predicted dire effects from the Clinton hike; instead we had a boom that eclipsed Reagan’s. They predicted wonderful things from the Bush tax cuts; instead we got an unimpressive expansion followed by a devastating crash. And they predicted terrible things from the tax rise after Obama’s reelection; instead we got the best job growth since 1999.
And when I say “they predicted”, I especially mean Laffer himself, who has a truly extraordinary record of being wrong at crucial turning points. As Bruce Bartlett .. http://www.thefiscaltimes.com/Columns/2011/06/24/Will-Higher-Taxes-Tank-the-Economy .. pointed out a few years ago, Laffer was even wrong during the Reagan years: he predicted that the Reagan tax hikes of 1982, which partially reversed earlier cuts, would cripple the economy; “morning in America” promptly followed. Oh, and let’s not forget his 2009 warnings about soaring interest rates and inflation.
The question you should ask, then, is why this always-wrong economic doctrine now has a stronger grip on the GOP than ever before.
It wasn’t always thus. George W. Bush’s inner circle clearly had little use for the likes of Laffer; they engaged in a lot of deceptive advertising about the economy (and a few other things), but they never made extravagant supply-side claims — and remember that Greg “charlatans and cranks” Mankiw served as chairman of the Council of Economic Advisers. But since 2009 the GOP has swerved hard right into fantasy land — and it has done so despite a remarkable string of dead-wrong predictions by the people peddling that fantasy.
Tankersley quotes me as saying that it’s about wanting economists who tell them what they want to hear, which is self-evidently true. But that kind of wishful thinking is always around. What seems to have happened to American conservatives is that they have lost all the checks and balances that used to limit that kind of solipsism. And of course it’s not just economic policy.
What do we do in the face of a major party gone mad?
https://krugman.blogs.nytimes.com/2015/04/10/the-laffer-swerve/
Help them learn just how wrong they are. All of them.
See also:
Economix - Explaining the Science of Everyday Life
[...]
A careful study by the C.B.O., however, found that the Bush tax cuts reduced revenues by $3 trillion through 2011, adding that much to the national debt.
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=71892035
Plutocracy, Paralysis, Perplexity
[...]
For the past century, political polarization has closely tracked income inequality, and there’s every reason to believe that the relationship is causal. Specifically, money buys power, and the increasing wealth of a tiny minority has effectively bought the allegiance of one of our two major political parties, in the process destroying any prospect for cooperation
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=75222884
The New Republicans
[...]
First, on economic issues the modern Democratic party is what we would once have considered “centrist”, or even center-right. Obama’s Heritage-Foundation-inspired health care plan is to the right of Richard Nixon’s [ http://www.washingtonpost.com/blogs/wonkblog/wp/2012/11/19/cheer-up-papa-johns-obamacare-gave-you-a-good-deal/ ]. Nobody with political influence is suggesting a return to pre-Reagan tax rates on the wealthy. Fantasies about Obama as a socialist, redistributionist hater of capitalism bear no more resemblance to reality than fantasies about his birthplace or religion.
Second, today’s Republican party is an alliance between the plutocrats and the preachers, plus some opportunists along for the ride — full stop.
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=81750177
Patriots Player Writes Moving Letter to Barack
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=130714291
"Using it to argue lower taxes today, debunked comprehensively"
Josh Barro @jbarro MARCH 17, 2015
Stephen Savage
Last week, I wrote about the new tax plan from Senator Marco Rubio .. http://www.nytimes.com/interactive/2015/04/14/us/elections/marco-rubio.html?inline=nyt-per .. and Senator Mike Lee as the “Puppies and Rainbows Tax Plan,” because it’s a plan that includes something for everyone. It calls for big tax credits for middle-income families with children, corporate tax cuts and complete elimination of the capital gains tax — and as a result would cost trillions of dollars in revenue over a decade.
Or would it?
The Tax Foundation released a report .. http://taxfoundation.org/article/economic-effects-rubio-lee-tax-reform-plan .. last week arguing the Rubio-Lee plan would generate so much business investment that, within a decade, federal tax receipts would be higher than if taxes hadn’t been cut at all. According to William McBride, the chief economist at the right-of-center think tank, the senators’ plan would add 15 percent to gross domestic product and 13 percent to wages.
If that sounds aggressive to you, you’re not alone: I discussed the Tax Foundation report with 10 public finance economists ranging across the ideological spectrum, all of whom said its estimates of the economic effects of tax cuts were too aggressive. “This would not pass muster as an undergraduate’s model at a top university,” said Laurence Kotlikoff, a Boston University professor whom the Tax Foundation specifically encouraged me to call.
Of course, a lot of flawed think tank reports are released every year. This one matters because the House adopted a rule in January .. http://www.bna.com/house-adopts-dynamic-n17179921893/ .. that requires “dynamic scoring” of tax bills: analyses (such as the Tax Foundation’s) that give legislation credit for its likely macroeconomic effects, including any rise in tax receipts due to economic growth.
In principle, dynamic scoring is fine. Tax policy really does affect the economy, and the right tax policies can produce economic growth that increases the amount of taxable income. But as the Tax Foundation report shows, dynamic scoring can be misused: You can get essentially any answer you want out of a dynamic tax model by changing the assumptions about economic behavior that you plug into it. If you turn the dials far enough, you’ll get a report that shows a tax cut will pay for itself, even if it won’t.
The key question is, will the Congressional Budget Office .. http://topics.nytimes.com/top/reference/timestopics/organizations/c/congressional_budget_office/index.html?inline=nyt-org , implementing dynamic scoring under new leadership chosen by Republicans, be more responsible than the Tax Foundation and other conservative think tanks in choosing its assumptions?
(I should note, in the interest of disclosure, that I worked at the Tax Foundation for about a year, from 2008 to 2009. I maintain a cordial relationship with the staff there, or at least I did at the time this article was filed. I never worked with Mr. McBride.)
The models that get conservatives excited about dynamic scoring often cause such excitement because their aggressive assumptions lead to implausibly rosy results. In 2011, the Heritage Foundation put out a report finding that Paul Ryan’s budget plan, which called for sharp cuts in taxes and spending, would have caused unemployment to stabilize below 3 percent. After various observers pointed out this was implausible, Heritage revised its model .. http://www.slate.com/articles/business/moneybox/2011/04/model_misbehavior.html .. to call for a higher unemployment rate — without changing its strongly positive findings about other economic indicators, such as G.D.P., that should be affected by unemployment.
In the case of the Tax Foundation, the optimistic results come mostly from assumptions about business investment being wildly responsive to tax policy. Its report found 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.
The Republican senators Mike Lee, left, and Marco Rubio before a news conference March 4 to introduce their proposal for an overhaul of the tax code. Credit Drew Angerer/Getty Images
You might think a cut in taxes on investment would increase returns to investors in the long run. But the Tax Foundation’s model says that isn’t so — instead, it assumes investment would rise as much as was necessary to bid down pretax returns so that aftertax returns were unchanged. For example, automakers would pay a lower tax rate, but they’d make more cars, flooding the market until profit margins fell enough to fully offset the benefits of the tax cut. This assumption is how the Tax Foundation reaches the conclusion that Rubio-Lee would drive an enormous increase in investment.
This assumption led various economists to invoke the names of small islands.
“That’s true for the Netherlands Antilles, it’s not true for us,” said Doug Holtz-Eakin, the former head of the Congressional Budget Office who was John McCain’s top economic adviser during his 2008 campaign.
“It’s a model that might be appropriate for Bermuda,” Mr. Kotlikoff said.
In a very small, very open economy, the Tax Foundation might be right: Cuts in investment taxes would drive a flood of foreign capital, producing a huge percentage increase in investment. But the United States is simply too big for that to work. The U.S. economy also is not perfectly open; for example, we have some restrictions on trade. Therefore, estimates of the amount of investment created by investment tax cuts should be more modest. Economists also criticized the Tax Foundation model for assuming all that new investment would fall into place very rapidly, and for failing to address economic effects from spending cuts or increased borrowing that the tax cuts would require in their first years.
To be clear, Senator Rubio and Senator Lee have not claimed their tax plan would pay for itself. Mr. Rubio was quoted in Bloomberg as saying, “I’ve never believed that tax reform by itself should pay for itself.” While the Congressional Budget Office has not used dynamic scoring as the basis for official cost estimates in the past, it has provided informational estimates of major fiscal proposals’ effects on the economy, showing considerably more modest effects than the Tax Foundation finds, and with a significant range of uncertainty around those estimates.
For example, to estimate how tax cuts affect the economy, you need to estimate how much more people will work if you cut their taxes. The C.B.O.’s “central” estimate of this effect is about two-thirds what the Tax Foundation assumes, but it provides a range of possible effects, from close to zero to approximately as large as the Tax Foundation says. While some answers about how taxes affect the economy are wrong (as discussed above, the Tax Foundation’s estimates of taxes’ effects on capital are well outside the consensus range), there is no single answer about any parameter that is known to be right.
“I worry that, if they decide one way to do a dynamic score, it will seem to some people that has settled the debate over the likely economic effect,” Joel Slemrod, a public finance economist at the University of Michigan, said of the Congressional Budget Office. “You can’t say anything definitive.”
But if dynamic scoring is to serve as the basis for legislation — and for determinations of whether legislation increases the budget deficit or not — Congress is going to have to pick a point within the range of estimates to rely on. In fact, it already does that by using a static score, which is the same as assuming the macroeconomic effect of tax changes is zero. A zero assumption is wrong, but it is not necessarily that wrong. Some economists I spoke with thought Rubio-Lee would generate substantial economic gains, even if they were not as substantial as the Tax Foundation estimates; others thought any gains would be small.
“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.
The crucial thing to watch, in the guts of future C.B.O. reports that rely on dynamic scoring, will be whether the new dynamic assumptions are more reasonable than zero — or whether, like the Tax Foundation assumptions, they take us farther away from accuracy, and make unsupportable promises of tax cuts paying for themselves.
https://www.nytimes.com/2015/03/17/upshot/tax-cuts-still-dont-pay-for-themselves.html?_r=0
--
The Laffer Swerve
April 10, 2015 10:03 am April 10, 2015 10:03 am
Credit Congressional Budget Office
Jim Tankersley has a good article on Arthur Laffer’s never-stronger influence on the Republican party .. http://www.washingtonpost.com/business/economy/arthur-laffer-has-a-neverending-supply-of-supply-side-plans-for-gop/2015/04/09/04c61440-dec1-11e4-a1b8-2ed88bc190d2_story.html , with just one seriously misleading statement:
-
Laffer’s ideas have also grown out of fashion with much of the mainstream economic community. There is an entire branch of economic literature that uses detailed equations to show cutting top tax rates does not spark additional growth.
-
No, Laffer hasn’t “grown out of fashion” with mainstream economics — he was never in fashion. There was never any evidence to support strong supply-side claims about the marvels of tax cuts and the horrors of tax increases; even freshwater macroeconomists, despite their willingness to believe foolish things, never went down that road.
And nothing in the experience of the past 35 years has made Lafferism any more credible. Since the 1970s there have been four big changes in the effective tax rate on the top 1 percent: the Reagan cut, the Clinton hike, the Bush cut, and the Obama hike. Republicans are fixated on the boom that followed the 1981 tax cut (which had much more to do with monetary policy, but never mind). But they predicted dire effects from the Clinton hike; instead we had a boom that eclipsed Reagan’s. They predicted wonderful things from the Bush tax cuts; instead we got an unimpressive expansion followed by a devastating crash. And they predicted terrible things from the tax rise after Obama’s reelection; instead we got the best job growth since 1999.
And when I say “they predicted”, I especially mean Laffer himself, who has a truly extraordinary record of being wrong at crucial turning points. As Bruce Bartlett .. http://www.thefiscaltimes.com/Columns/2011/06/24/Will-Higher-Taxes-Tank-the-Economy .. pointed out a few years ago, Laffer was even wrong during the Reagan years: he predicted that the Reagan tax hikes of 1982, which partially reversed earlier cuts, would cripple the economy; “morning in America” promptly followed. Oh, and let’s not forget his 2009 warnings about soaring interest rates and inflation.
The question you should ask, then, is why this always-wrong economic doctrine now has a stronger grip on the GOP than ever before.
It wasn’t always thus. George W. Bush’s inner circle clearly had little use for the likes of Laffer; they engaged in a lot of deceptive advertising about the economy (and a few other things), but they never made extravagant supply-side claims — and remember that Greg “charlatans and cranks” Mankiw served as chairman of the Council of Economic Advisers. But since 2009 the GOP has swerved hard right into fantasy land — and it has done so despite a remarkable string of dead-wrong predictions by the people peddling that fantasy.
Tankersley quotes me as saying that it’s about wanting economists who tell them what they want to hear, which is self-evidently true. But that kind of wishful thinking is always around. What seems to have happened to American conservatives is that they have lost all the checks and balances that used to limit that kind of solipsism. And of course it’s not just economic policy.
What do we do in the face of a major party gone mad?
https://krugman.blogs.nytimes.com/2015/04/10/the-laffer-swerve/
Help them learn just how wrong they are. All of them.
See also:
Economix - Explaining the Science of Everyday Life
[...]
A careful study by the C.B.O., however, found that the Bush tax cuts reduced revenues by $3 trillion through 2011, adding that much to the national debt.
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=71892035
Plutocracy, Paralysis, Perplexity
[...]
For the past century, political polarization has closely tracked income inequality, and there’s every reason to believe that the relationship is causal. Specifically, money buys power, and the increasing wealth of a tiny minority has effectively bought the allegiance of one of our two major political parties, in the process destroying any prospect for cooperation
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=75222884
The New Republicans
[...]
First, on economic issues the modern Democratic party is what we would once have considered “centrist”, or even center-right. Obama’s Heritage-Foundation-inspired health care plan is to the right of Richard Nixon’s [ http://www.washingtonpost.com/blogs/wonkblog/wp/2012/11/19/cheer-up-papa-johns-obamacare-gave-you-a-good-deal/ ]. Nobody with political influence is suggesting a return to pre-Reagan tax rates on the wealthy. Fantasies about Obama as a socialist, redistributionist hater of capitalism bear no more resemblance to reality than fantasies about his birthplace or religion.
Second, today’s Republican party is an alliance between the plutocrats and the preachers, plus some opportunists along for the ride — full stop.
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=81750177
Patriots Player Writes Moving Letter to Barack
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=130714291
It was Plato who said, “He, O men, is the wisest, who like Socrates, knows that his wisdom is in truth worth nothing”
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