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Economix - Explaining the Science of Everyday Life

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Alex G   Thursday, 02/09/12 12:51:45 AM
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Economix - Explaining the Science of Everyday Life
February 7, 2012, 6:00 am
Tilting the Budget Process to the G.O.P.

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

The House of Representatives voted last week to tilt the budgetary process in favor of the Republican economic agenda. On Feb. 3, the House passed H.R. 3582, the Pro-Growth Budgeting Act of 2012. Innocuous on the surface, its long-term purpose is to institutionalize Republican economic policy into the very fabric of budgetary analysis.

The legislation would require that the Congressional Budget Office and Joint Committee on Taxation do a “dynamic” analysis of major legislation – defined as that with a gross budgetary impact greater than 0.25 percent of the gross domestic product. Such an analysis would calculate the impact on real G.D.P. growth, the capital stock and labor supply.

The dynamic calculation would be supplementary and not replace the current official scoring methodology, but the obvious long-term goal is to require official revenue estimates to incorporate “Laffer curve” effects in order to make it easier to cut taxes and harder to raise them.

The Laffer curve, named for the economist Arthur Laffer, posits that tax rates may be so high that a tax-rate reduction will raise revenue to the government and a tax-rate increase will lower revenue.

While no economist denies the theoretical possibility of a revenue-raising tax cut or revenue-losing tax increase, Republicans talk as if the United States is always on the high side of the Laffer curve – no matter what the tax rates are – so every tax cut will pay for itself and no tax increase could possibly ever raise net revenue and thus reduce the deficit.

There was a plausible case that reducing the top income tax rate in 1981 to 50 percent from 70 percent would raise net revenue, mainly by curbing the value of tax shelters. But of course, reducing the bottom rate to 11 percent from 14 percent was just a pure revenue loser.

Contrary to liberal mythology, the Reagan administration never asserted that the 1981 tax cut would come anywhere close to paying for itself. All its official revenue estimates conformed to standard revenue-estimating methodology and incorporated no supply-side effects.

Nor did the George W. Bush administration ever assert that any of its tax cuts would pay for themselves. Yet Republican leaders like Senator Mitch McConnell of Kentucky continually assert that they did, in fact, pay for themselves and had no impact on the deficit.

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.

As the budget deficit increasingly inhibits Republicans’ tax-cutting, they are planning ahead for tax cuts that they will insist are costless because they will so massively increase growth. But for that approach to work, the C.B.O. and the Joint Committee on Taxation, Congress’s official budget and tax estimators, need to be forced to play along.

That’s what the new legislation is all about.

It goes without saying that Congress deserves the most accurate possible estimates of the revenue effects of tax legislation, and no one denies that many past estimates have sometimes been far off because of unforeseen circumstances, such as recessions.

But Republicans assert that the errors are systematic and result principally from Keynesian economics. As the Budget Committee report on H.R. 3582 explains, the computer models used by the C.B.O. “are driven by traditional Keynesian economic relationships that emphasize the influence of aggregate demand on output in the short term.”

My concern is that the Republican effort is just a smokescreen to incorporate phony-baloney factors into revenue estimates to justify unlimited tax cutting. How soon before the C.B.O. is required to incorporate estimates from the right-wing Heritage Foundation in its calculations?

It already has a very well-financed Center for Data Analysis that the chairman of the House Budget Committee, Paul Ryan of Wisconsin, used to analyze his budget plan last year, bypassing the Joint Committee on Taxation and C.B.O.

Moreover, my memory is still fresh regarding the documented Republican effort in 2003 to suppress internal estimates of the cost of the Medicare Part D program. Medicare’s chief actuary, Richard Foster, has testified to the pressure that was put on him by a Bush administration political appointee, Tom Scully, which was documented by the inspector general for the Department of Health and Human Services.

(I also remember Newt Gingrich’s demand that every Republican in Congress vote yes on this budget-busting legislation, which added $16 trillion to the federal government’s long-term debt, according to Medicare’s trustees.)

I am also suspicious of what appear to be politically motivated investigations into C.B.O. by Republican congressional staff members, reported on Feb. 2 by The Wall Street Journal, and Republican efforts to gut the Government Accountability Office.

As I have previously noted, this fits into a pattern – since getting control of Congress in 1995, Republicans have often abolished institutions that they couldn’t turn into puppet organizations for promoting their agenda.

In other words, it is an issue of credibility. Republicans don’t really care about accurate revenue estimates; they just want them to show that tax cuts pay for themselves, so they can pass more of them without constraint. As my fellow Economix contributor Simon Johnson has noted, the corruption of the agencies that produce budget data is a crucial cause of Europe’s debt crisis.

Confirmation of this fear is the fact that the House-passed legislation would not require a dynamic estimate for appropriations bills, no matter how large. Republicans want the world to know that tax cuts expand real G.D.P., the capital stock and labor supply, but if spending has any such effect they don’t want anyone to know. Implicitly, Republicans want everyone to think that spending never raises growth because it’s their dogma.

But in the real world, everyone knows that government investments in the national highway system, medical and other scientific research, and other programs unquestionably add to growth. And there are times when government spending can provide macroeconomic stimulus, which the C.B.O. has repeatedly documented, to the consternation of Republicans.

Over the last three years, we have seen Republicans politicize every aspect of policy making – filibustering virtually every administration bill and appointment in the Senate, risking default on the national debt by refusing to raise the debt limit, and routinely threatening government shutdowns unless the White House accedes to their demands.

It is reasonable to assume that the Republicans’ effort to alter the budget process is just another aspect of their goal to politicize policy and institutionalize their philosophy.

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