A Short CBO Primer
At least what the plan is...
It is the job of Congress to spend tax money. This "difficult" task generally takes the form of proposing legislation which, as it develops through the process, ultimately becomes a spending bill. The theoretical plan for handling such a piece of legislation is to thoroughly research it, carefully write it all out, debate it in the committee which corresponds to what type of bill it is [why the money will be spent, and what will be purchased] and finally, to submit it for amendments and a floor vote.
As we examine the "researching" and "debating" phases of this work, we will inevitably encounter the efforts of the CBO, the Congressional Budget Office. The "debating" activity will focus on all sorts of things, but among those will be questions such as:
"What will this bill's spending do to the deficit and the national debt?"
"What will this bill do to the US economy? Will it increase economic [GDP] growth for the country?"
"Is the benefit resulting from this spending a good value? Is what is intended to be purchased going to be worth what is going to be spent?"
As the members of Congress "research" the bill to see if they will vote for it, they need answers to such questions, and for these answers, they turn to the Congressional Budget Office. The CBO will analyse all the possible effects of such a bill, size up the "business end" to see if all the details are in order and issue their report, that is, "score" the bill.
Naturally, given the importance of this "scoring" report, the CBO faces a constant challenge to be quite "objective" with respect to the process and calculations used for the analysis. For the Congress the best that such a rating of being "objective" can get is to be considered by all the members as "bi-partisan."
By "bi-partisan" Congress implies that the CBO analysis serves the legislative interests of both sides in a roughly equal way. To promote this opinion on both sides the CBO is careful to always be entirely transparent, openly revealing in each case the precise method of the calculation and the nature of all the calculative assumptions used to prepare the report.
The GOP and the CBO
Hardly a "marriage made in heaven..."
Viewed from one perspective, the CBO has not been a "friend" of the GOP in recent years. However, this unpleasant relationship is more than a mere "personality clash." Consistently, during this period what Republicans have wanted to see in the results of a CBO "scoring" for one of their legislative policy proposals has been a tragic, on-going disappointment for them.
In every case when one of these GOP legislative bills has been submitted to the CBO, Republicans have -- almost before the ink was dry -- begun to have "Santa Claus" dreams about what kind, positive things the CBO's report might say about it. In these dreams of theirs, the CBO's analysis would yield a wonderful, dream-like report saying that this or that Republican legislative proposal was going to painlessly deliver "just a few more favors" to the oligarchs who own the GOP while not hurting "a single hair on the head" of the US economy "even one little bit."
Or, better yet -- and perhaps even more dreamily -- that some tea bag bill [usually originally authored by corporate lobbyists] was going to magically "boost" the economy and spew prosperity out to absolutely everyone.
When the ownership of the GOP slipped into the hands of the billionaires roughly 30 years ago, it signalled the end of all such sentiment coming from Republicans. Seen from this point of view, no Republican legislative policy has intentionally benefited the middle class during these three painfully long decades of abuse.
While normal Americans may have benefited a little, "here and there," from the Republicans' corporate "give-aways" and "pay backs," the primary focus of GOP legislation has been to constantly route more and more money to the top one percent while "trickling down" just enough to validate the Party's disturbingly low efforts at being "representative."
If you are skeptical about the all encompassing scope of such an assertion, counter it. What GOP legislation has benefited working class Americans even one tenth as much as it benefited corporate interests in the three decades since Reagan?
It's not surprising that the Republican legislative "CBO dream" would be a "scoring report" that might fracture such a bad record in a politically advantageous way. However, because Republicans continue to blindly focus on politics instead of ever focusing on policy, this already disturbingly pathetic "record" of theirs simply continues to get worse. That trend is only further aggravated when they attempt to disguise it as anything else.
2015: The Return of the "Un-Dead"
After the first two tries failed utterly,
it's clearly time for a new name.
Selling trillion dollar corpses has never been easy. While the fundamental scheme has remained the same, the repeated attempts to trick the American tax payers has used a different name each time it has been tried.
First Try: "Trickle Down"
Accompanying Lie: Economic VooDoo
Motto: "Fool me once, shame on you."
The Reaganesque "trickle down" theory had a single purpose. It was designed to justify various deregulation schemes, proposed loop holes and tax cuts for the new owners [new in the 1980's] of the Republican Party and even for the growing trend to off shore every job possible to countries offering rock bottom labor costs. The propaganda rhetoric was necessary because American voters of the day would be, shall we say, "looking askance" at such fiscal largess with such "visible beneficiaries."
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| [data - Tax Foundation] |
The "trickle down" part suggested that diverting all of this tax revenue to the "capitalists" at the very top of the economic ladder would result in great prosperity for the country -- including, of course, for all the Americans who weren't anywhere close to the "top" of that ladder.
As we look at the graph [above] the curves may be labelled in rather droll economic terms, but the message remains chillingly clear. The taxes avoided by those in the top individual income tax rate class went into their pockets. Reagan's national "astonishing revenue increase" came from the higher per capita tax payments being made by everyone else.
It was raw wealth redistribution. In this early stage hardly anyone noticed the pain. The national debt hit the $1 Tn mark for the first time in a few months.
Second Try: "Job Creators"
[There was no "accompanying lie" to lend credence to this one.]
Motto: "Fool me twice, shame on you."
The Bush W./Paulson/Murdoch espoused "job creators" concept was propaganda designed with the intention of identifying/creating a rather mythical class of "benevolent industrial oligarchs" in the minds of the electorate. These gaseous but noble "captains of industry" -- if bribed with sufficient deregulation, loop holes and tax cuts -- would, in return, act, so to speak, "out of character," that is, would reject the habit of exporting every possible job to counties with lower labor costs, and, instead, "try" to hire Americans to do those jobs here.
This never showed any of the the faintest signs of even "beginning" to work.
Los Angeles Times
February 17, 2014
By David Horsey
[Excerpted. Read the entire article here - LA Times]
Especially when it comes to economic policy, too many politicians are
motivated by myths more than by facts. A prime example: the myth of the
job creators.
Republicans, such as Speaker of the House John
Boehner, talk of job creators in reverent, worshipful terms. In their
vision of how the world works, it is these brave titans of capitalism
who, with no help from anyone else, build the companies that create jobs
for American workers. To Boehner and his party, anything that inhibits
job creators in their endeavors — taxes, environmental laws, financial
regulations — is a job killer.
This is economic theory at its most
simplistic and has been proven erroneous, over and over again. A
dramatic example: The financial debacle of 2008 that killed millions of
jobs was, in large part, the result of bankers and financiers being
liberated from federal regulations that had once served as a check on
free-market excesses. Nevertheless, conservative members of Congress
cling to the myth and continue to call for lower taxes and fewer
regulations.
Third Try:"Dynamic Scoring"
[Republicans are sticking to the "accompanying lie" from "job creators."]
Motto: "Still trying to fool me? Call the Koch brothers. This is getting complicated.."
Oh, sure. Both the "trickle down" and the "job creators" ideas landed in unmarked graves in the political cemetery just beyond the land fill, but that's no reason not to try again. The "prize" remains identically the same -- justify deregulation, loop holes and tax cuts for the wealthiest Americans and corporations by touting the great economic returns which would accompany, in this third try, "dynamic scoring."
However, right away, a fly appeared in the clever GOP's soup. A "fly?" Yes. A "fly" called the CBO.
The CBO analysed the "dynamic scoring" idea and came up with roughly the same really discouraging conclusions that it came up with after it scored the "trickle down" and "job creators" ideas. The conclusion? "Dynamic scoring" is junk, and the "new way" [The economic impact of "dynamic scoring" must be calculated in a very special way to get the answer the GOP wanted.] of calculating the policy's impact on the economy is also, well, junk.
The "dynamic scoring" scam has almost all of the economy wrecking, wealth redistributing "doo dads" found in the previous scams, except, of course, it is graced with a glitzy new name. The plan should be quite familiar. Regulations will be obliterated, loop holes will be installed and tax cuts will be legislated. However, rather than relying on the "altered generosity" of some previously cravenly greedy billionaires -- resulting in their doing "nice things" for the economy -- "dynamic scoring" targets all parts of the entire economy to receive the "new energy" at once.
If you are a middle class visitor to MeanMesa, you can think of it as somewhat similar to the "high tide that lifts all boats" concept. However, don't get your hopes up too high -- you won't be needing a life vest. Those "boats" will all be from the country club's marina. While we are fumbling around down here under the bus with the new "economic policy," the Treasury will be getting lighter by the minute.
Generally, arriving at such a "logger head" would have prompted an actual political party to immediately consider "restructuring" their economic idea and producing a plan which the CBO would have "scored as better." However, the 2015 Republicans predictably dismissed such an idea in favor something more along the lines of the "winner takes all" philosophy of the semi-literate tea bags and their unscrupulous billionaire bosses.
The oligarchs who own the Republican Party immediately also approved.
Since they control the Congress, the Republicans decided to castrate the CBO, appoint a new "director" -- one who thought along the same lines that they thought along -- and revamp the calculation schemes to produce the "right answers." Having officially dumped both the "trickle down" and "job creators" failures, the new name, "dynamic scoring" was prepared and promoted by the oligarchs' obedient think tanks.
In terms of economic policy, this is the return of the "un-dead." Every facet of every one of these looting schemes is identical regardless of the name currently attached to it. Every one of these schemes was "cooked up" by the same lobbyists and think tanks following the orders of the same billionaires and plutocrats. Every American tax payer, bruised and beaten by the Great Republican Melt Down of 2008, who thought these cancerous scams had finally been laid to rest with a wooden stake through their hearts...was wrong.
The Republican House is almost certainly scheming a way to do exactly this the very next minute after they pay back the Koch brothers by authorizing the Keystone XL pipeline. John Boehner is already thinking of some way to sell the monster to the already suspicious tea bag hill billies in his caucus.
Let's do a little reading.
Two Views of "Dynamic Scoring"
It HAS to have a "good" side, right?
While the GOOGLE algorithm will instantly provide an abundant list of material written about the subject, MeanMesa has selected two articles to be included here.
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| 3-Card Monte Carlo Algorithms for GOP Death and Taxes [image - DailyKOS] |
This article is from DailyKOS. [Excerpted. Read the entire article here - DailyKOS ]
Cooking the Books
Preventing Uncle Sam from collecting tax revenue is one sure way to
starve the government and increase budget deficits. Another is to
systematically overestimate how much revenue federal taxes will generate
in the first place. And by all indications, that's precisely what the
new GOP majority in Congress plans to do beginning in 2015.
That's the meaning of the GOP's twin decisions to demand so-called "dynamic scoring" of budget legislation and to replace the well-respected head of the nonpartisan Congressional Budget Office, Doug Elmendorf.
Over the years, Elmendorf has established a reputation as an
even-handed, no-drama authority whose budget estimates have both helped
and hurt (especially on the $10.10 minimum wage proposal) President
Obama's agenda. It's precisely because of that credibility that some
Republicans, notably including the American Enterprise Institute and
Bush economists Gregory Mankiw and Douglas Holtz-Eakin, want the new GOP
Congress to keep Doug Elmendorf on for another term at CBO.
But as the New York Times reported, Grover Norquist, the Heritage Foundation, the Wall Street Journal and others in the "tax cuts pay for themselves" crowd want to replace Elmendorf with a compliant GOP ideologue. While AEI's
Michael R. Strain gushed "Doug Elmendorf has been so exceptional, he
seems to be trying as hard as possible to give a fair, unbiased review
of academic literature on all these issues:"
Not so, say the most ardent conservatives, who want Mr. Elmendorf, a former Federal Reserve economist, replaced as soon as his term ends on Jan. 3. Grover G. Norquist, the small-government, low-tax activist at Americans for Tax Reform, has prominently laid out an indictment that includes putting a supposedly inaccurate price tag on the Affordable Care Act and Mr. Elmendorf's "failed Keynesian economic analysis."
Dan Holler, a spokesman for Heritage Action, the political arm of the Heritage Foundation, agreed. "It would be absurd for a Republican-controlled Congress to keep Elmendorf at the helm of the C.B.O," he said. "For a party looking to change the culture in Washington, this would be a good place to start."
Especially if the culture Republicans want to change is one of honesty and fidelity to the truth.
Now, Republicans painted a target on the CBO
long ago. When the agency in 2011 concluded that repealing Obamacare
would increase the national debt, Eric Cantor called it "budget
gimmickry." Then the 2012 GOP presidential front-runner went even
further, declaring "if you are serious about real health reform, you
must abolish the Congressional Budget Office because it lies." But it is
on the subject of tax cuts that CBO scorekeeping has burst the most
Republican blood vessels.
Ever since Paul Ryan
introduced his "Path to Prosperity" budget, the incoming House Ways and
Means Committee Chairman has faced the same $6 trillion, 10-year hole.
After simple math showed that his tax-cut windfall for the wealthy would
add trillions to the national debt, Ryan among other conservatives
decided to change the way the CBO does math.
As Lori Montgomery of the Washington Post
explained last month, the man Charles Pierce calls the "zombie-eyed
granny starver" plans to change the way the nonpartisan Congressional
Budget Office calculates the impact of tax cuts:
Earlier this year, Camp released a tax reform draft that showed the enormous difficulty of achieving Ryan's goal of getting tax rates down to 25 percent.
Ryan has said it would be easier to hit that target if the Congressional Budget Office used a process called "dynamic scoring" to measure broad effects on the economy when judging tax legislation. While CBO already uses dynamic scoring on a limited basis, Ryan said Wednesday he will have additional recommendations in the new Congress "for making sure we take these things into consideration."
As the Center on Budget and Policy Priorities (CBPP)
warned in response, "Budget and tax plans should not rely on 'dynamic
scoring' because the estimates it produces are "highly uncertain and
subject to manipulation." Which is precisely why Paul Ryan and his
Republican allies want to change the way math itself works as soon as they control both chambers of Congress. And if they succeed, voodoo economics will become a feature, not a bug.
In September, Ryan promised the Wall Street group, the Financial Services Roundtable,
"I'd like to improve our scorekeeping so it better reflects reality."
By "improve our scorekeeping," Ryan means forcing the nonpartisan
Congressional Budget Office (CBO) to change the way it forecasts (or
"scores") the impact of tax and budget legislation. And by "better
reflects reality," Paul Ryan means rigging the outcome so GOP
tax-cutting bills don't appear to hemorrhage the red ink they inevitably
must. As The Hill reported:
Ryan said if Republicans take control of the Senate, they will be able to calculate the price tag of legislation differently. Republicans have long pushed for the Congressional Budget Office to use "dynamic scoring" when calculating the costs of legislation. Currently, the CBO scores legislation using static scoring, which does not take into account how behavioral changes brought on by legislation could in turn alter how much a particular provision costs.
But Ryan and Republicans argue that adopting a new scoring method would make it easier to adopt revenue-neutral policies, and also paint a more accurate picture. If the GOP controlled Congress, they could change the calculation methods employed by the CBO.
"The scorekeeping we use is not correct," he said.Ryan's crusade to magically whitewash red ink has been a Republican cause for decades. To one degree or another, pretty much every major Republican tax cut scheme from Reagan in 1980, Dole in 1996 and Bush in 2000 to Mitt Romney in 2012 and Paul Ryan's "Path to Prosperity" budget have claimed that the hemorrhage of revenue for the U.S. Treasury from their gargantuan tax cut windfalls for the gilded-class would be offset by "macroeconomic feedback," or bigger collections from a supposedly surging economy. Without resorting to the sleight of hand that is dynamic scoring, these GOP budgets invariably produce red ink as far as the eye can see. That's why House Republicans last proposed H.R. 3582 (the "Pro-Growth Budgeting Act") to require that the CBO estimates also use dynamic scoring to incorporate "supply-side assumptions about the growth-generating magic of tax cuts into official budget estimates, enabling conservatives to evade the deficit-boosting implications (and various congressional barriers that come along with them) of their pet proposals for reducing the tax burden of 'job creators.'"
Most analysts have encouraged the Congressional Budget Office and
other forecasters to steer clear of dynamic scoring for two very
compelling reasons. First, there's no consensus on how to model it,
making the process ripe for manipulation and political chicanery. As
former deputy assistant director for tax policy at the Congressional
Budget Office and current fellow at the Tax Policy Center Roberton
Williams warned:
"We really don't understand the science well enough to do it right. The assumption built into the model determines, in large part, what comes out of the model. There's going to be conflict unless there's some agreement on what ought to go in."But it's not just that "there's a great deal of uncertainty" about "the right way to model things," as TPC's Donald Marron put it. There's also the matter of the historical record: for over 30 years, bogus conservative claims about the revenue-increasing effects of tax cuts have been proven cataclysmically wrong.
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| Warning! Hill billies who have already sold out to their billionaire masters should NOT be running the economy. |
It's worth noting that current conservative economic propagandist and former McCain economic adviser Douglas Holtz-Eakin couldn't make the dynamic scoring alchemy work for the Bush administration, either:
In 2003, Doug Holtz-Eakin was appointed by Republicans to lead the CBO during the Bush years, and he came under intense pressure to use more dynamic analyses. But studies he commissioned found that dynamic scoring was devilishly complicated and wouldn't lead to drastically different estimates. As he explained in a 2011 hearing before the House Ways and Means Committee, "it is unlikely to change the bottom line very much over the budget window."Despite the bitter experience of the Bush years, Mitt Romney made the same GOP shell game part of his tax plan in 2012. As Ezra Klein suggested in "The Dynamic Dodge in Romney's Budget," Mitt's scheme once again resurrected David Stockman's "magic asterisk:"
As a matter of theory, stronger economic growth could make Romney's plan work...if Romney really could double or triple the pace of economic growth, it would be much easier to make his numbers add up...
The technical term for the secret sauce that Romney is using in his budget projections is "dynamic scoring." The idea is that tax cuts make the economy grow faster. They make people work harder. They persuade rich people to stop hiding money away. And thus they don't cost as much as a "static analysis" -- one that didn't take into account all these effects -- would suggest.
As it turns out, Romney's 20 percent tax cut plan was basically the same one Bob Dole ran on—and lost on—in 1996. And the architect of that debacle, former Reagan Treasury official Bruce Bartlett,
has long since recanted his support for the "dynamic scoring" at the
heart of virtually every Republican tax plan. As Bartlett put it in
2012:
Somebody in Congress has to undertake the hard work of paying off the billionaires.
This second article is so arcane that MeanMesa thinks visitors here should have a little background to fully appreciate it. WARNING: It IS creepy.
1. The NBER is The National Bureau of Economic Research. You can visit the NBER home site at nber.org . This is what they say about themselves:
Founded in 1920, the National Bureau of Economic Research is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research in a scientific manner, and without policy recommendations, among public policymakers, business professionals, and the academic community.
2. The article's [below] attribution is given to these two individuals:
Nicholas Gregory Mankiw and Matt Weinzierl
N. G. Mankiw is an American macroeconomist of Ukrainian descent and Chairman and Professor of Economics at Harvard University. Mankiw is best known in academia for his work on New Keynesian economics.
From 2003 to 2005, Mankiw was chairman of the Council of Economic Advisers under President George W. Bush. In 2006, he became an economic adviser to Mitt Romney and continued during Romney's 2012 presidential bid. He is a conservative and he writes a popular blog, ranked the number one economics blog by US economics professors in a 2011 survey. He is also author of the best-selling textbook Principles of Economics.
Matt Weinzierl completed his PhD in economics at Harvard University in 2008 and is an Associate Professor in the Business, Government, and the International Economy Unit at Harvard Business School. Prior to his doctoral studies, Professor Weinzierl worked in the New York office of McKinsey & Company, specializing in financial services. From 2003 to 2004, he served as the Staff Economist for Macroeconomics on the President’s Council of Economic Advisers.
"In the long run, about 17 percent of a cut in labor taxes is
recouped through higher economic growth. The comparable figure for a
cut in capital taxes is about 50 percent."
Do tax cuts pay for themselves? To a substantial extent, yes, N. Gregory Mankiw and Matthew Weinzierl conclude in their study, Dynamic Scoring: A-Back-of-the-Envelope Guide (NBER Working Paper No. 11000).
Mankiw and Weinzierl note that when the staffs of the Treasury Department or Congressional committees estimate the revenue cost of tax cuts, they traditionally adopt a process known as static scoring. That is, they assume no feedback from tax changes to national income. By contrast, some observers have suggested that tax cuts can generate so much economic growth that they may more than pay for themselves. Most economists are doubtful about either such extreme. The consensus view is that tax cuts indeed influence national income, but not to the extent that they are fully self-financing.
In 2002 Congress undertook the difficult task of "dynamic scoring" of tax policy. This means developing a set of economic models that can be used to estimate the true revenue effect of tax proposals, including the feedback effects of taxes on national income. This task is challenging, because there is little agreement among professional economists about how best to model long-run economic growth and the impact of taxes on the economy.
Mankiw and Weinzierl consider the problem in light of a particular theory of economic growth, called the neoclassical growth model. This theory is the most widely taught model of capital accumulation and long-run growth, as well as a popular tool in scholarly literature in public finance. In this paper, they use the model to show how changes in taxes on capital and labor income affect national income and tax revenue. The model yields simple formulas for how the true dynamic estimates of these revenue effects differ from the traditionally used static estimates. These formulas in turn allow for some illuminating back-of-the-envelope calculations.
The authors begin with the simplest version of the neoclassical growth model, but they also consider various generalizations of the model to see which conclusions are robust. One generalization of the model includes an elastic supply of labor, so that hours worked can respond to economic incentives. Mankiw and Weinzierl find that regardless of labor supply elasticity, if capital and labor tax rates start off at the same level, cuts in capital taxes have greater feedback effects in the long run than do cuts in labor taxes.
According to the researchers, the neoclassical growth model and all of its variants indicate that the dynamic response of the economy to tax changes is substantial. In almost all instances, they find, tax cuts are at least partly self-financing. The authors conduct some simple calculations, plugging in numbers that approximately describe the U.S. economy. They find that, in the long run, about 17 percent of a cut in labor taxes is recouped through higher economic growth. The comparable figure for a cut in capital taxes is about 50 percent. This means that the true revenue cost of a cut in capital taxes is only half of the cost estimated with static scoring.
These results depend on a number of key assumptions, which are open to debate. Mankiw and Weinzierl acknowledge that current studies do not afford clear guidance about how best to apply the neoclassical growth model to the actual economy. Economists will need to focus next on evaluating which generalizations of the basic model are the most salient and then on estimating the key parameters. This task, the researchers say, is urgent. In 2003, Congress adopted a rule that requires the Joint Committee on Taxation to analyze the macroeconomic impact of any major tax cut bill before the House votes on such legislation. "One conclusion is impossible to escape," say Mankiw and Weinzierl.
"Difficult as it may be, the subject of dynamic scoring should remain a high priority for those economists advising lawmakers on issues of tax policy.
Remember, the Republicans have embraced this kind of policy in the first week of the Congressional session. Try to think of things you could have done to better prepare for what they did to us in 2008. Now would be a good time to start getting your family ready.
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...
My concern is that the Republican effort is just a smokescreen to incorporate phony-baloney factors into revenue estimates to justify unlimited tax cutting...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.Constraints, that is, like the facts, the truth and the unchangeable principles of basic math. That's why Paul Ryan wants to rename the new math he and his GOP friends demand the Congressional Budget Office use:
"He also noted that he prefers the term 'reality-based scoring' over 'dynamic scoring.'"Now, perhaps amazingly, these Bush era "economic advisors" are anxious to tout the great benefits possible should "dynamic scoring" be permanently attached to every House spending policy. [At the time of the post the House has already -- even in the very first days of GOP control -- "attached" the dynamic spending policy to major legislative parts of the Social Security Trust system.] Clearly, there will be no "trial" period before complete implementation.
Somebody in Congress has to undertake the hard work of paying off the billionaires.
This second article is so arcane that MeanMesa thinks visitors here should have a little background to fully appreciate it. WARNING: It IS creepy.
1. The NBER is The National Bureau of Economic Research. You can visit the NBER home site at nber.org . This is what they say about themselves:
Founded in 1920, the National Bureau of Economic Research is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research in a scientific manner, and without policy recommendations, among public policymakers, business professionals, and the academic community.
2. The article's [below] attribution is given to these two individuals:
Nicholas Gregory Mankiw and Matt Weinzierl
N. G. Mankiw is an American macroeconomist of Ukrainian descent and Chairman and Professor of Economics at Harvard University. Mankiw is best known in academia for his work on New Keynesian economics.
From 2003 to 2005, Mankiw was chairman of the Council of Economic Advisers under President George W. Bush. In 2006, he became an economic adviser to Mitt Romney and continued during Romney's 2012 presidential bid. He is a conservative and he writes a popular blog, ranked the number one economics blog by US economics professors in a 2011 survey. He is also author of the best-selling textbook Principles of Economics.
Matt Weinzierl completed his PhD in economics at Harvard University in 2008 and is an Associate Professor in the Business, Government, and the International Economy Unit at Harvard Business School. Prior to his doctoral studies, Professor Weinzierl worked in the New York office of McKinsey & Company, specializing in financial services. From 2003 to 2004, he served as the Staff Economist for Macroeconomics on the President’s Council of Economic Advisers.
 |
| Dynamic scoring: the magic math the GOP might use to make their tax cut dreams come true [image-VOX] |
Dynamic Scoring: A Back-of-the-Envelope Guide
January 6, 2015
Do tax cuts pay for themselves? To a substantial extent, yes, N. Gregory Mankiw and Matthew Weinzierl conclude in their study, Dynamic Scoring: A-Back-of-the-Envelope Guide (NBER Working Paper No. 11000).
Mankiw and Weinzierl note that when the staffs of the Treasury Department or Congressional committees estimate the revenue cost of tax cuts, they traditionally adopt a process known as static scoring. That is, they assume no feedback from tax changes to national income. By contrast, some observers have suggested that tax cuts can generate so much economic growth that they may more than pay for themselves. Most economists are doubtful about either such extreme. The consensus view is that tax cuts indeed influence national income, but not to the extent that they are fully self-financing.
In 2002 Congress undertook the difficult task of "dynamic scoring" of tax policy. This means developing a set of economic models that can be used to estimate the true revenue effect of tax proposals, including the feedback effects of taxes on national income. This task is challenging, because there is little agreement among professional economists about how best to model long-run economic growth and the impact of taxes on the economy.
Mankiw and Weinzierl consider the problem in light of a particular theory of economic growth, called the neoclassical growth model. This theory is the most widely taught model of capital accumulation and long-run growth, as well as a popular tool in scholarly literature in public finance. In this paper, they use the model to show how changes in taxes on capital and labor income affect national income and tax revenue. The model yields simple formulas for how the true dynamic estimates of these revenue effects differ from the traditionally used static estimates. These formulas in turn allow for some illuminating back-of-the-envelope calculations.
The authors begin with the simplest version of the neoclassical growth model, but they also consider various generalizations of the model to see which conclusions are robust. One generalization of the model includes an elastic supply of labor, so that hours worked can respond to economic incentives. Mankiw and Weinzierl find that regardless of labor supply elasticity, if capital and labor tax rates start off at the same level, cuts in capital taxes have greater feedback effects in the long run than do cuts in labor taxes.
According to the researchers, the neoclassical growth model and all of its variants indicate that the dynamic response of the economy to tax changes is substantial. In almost all instances, they find, tax cuts are at least partly self-financing. The authors conduct some simple calculations, plugging in numbers that approximately describe the U.S. economy. They find that, in the long run, about 17 percent of a cut in labor taxes is recouped through higher economic growth. The comparable figure for a cut in capital taxes is about 50 percent. This means that the true revenue cost of a cut in capital taxes is only half of the cost estimated with static scoring.
These results depend on a number of key assumptions, which are open to debate. Mankiw and Weinzierl acknowledge that current studies do not afford clear guidance about how best to apply the neoclassical growth model to the actual economy. Economists will need to focus next on evaluating which generalizations of the basic model are the most salient and then on estimating the key parameters. This task, the researchers say, is urgent. In 2003, Congress adopted a rule that requires the Joint Committee on Taxation to analyze the macroeconomic impact of any major tax cut bill before the House votes on such legislation. "One conclusion is impossible to escape," say Mankiw and Weinzierl.
"Difficult as it may be, the subject of dynamic scoring should remain a high priority for those economists advising lawmakers on issues of tax policy.
Remember, the Republicans have embraced this kind of policy in the first week of the Congressional session. Try to think of things you could have done to better prepare for what they did to us in 2008. Now would be a good time to start getting your family ready.
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