Still Crazy After All These Years
Buried deep in the news section of the April 1 Wall Street Journal (article not available online, but this piece in the Washington Times gives the flavor) was an intriguing tidbit reporting the latest findings of the non-partisan Congressional Budget Office on the impact of the Bush tax cuts on the economy going forward. The central tenet of supply-side economics is that the stimulatory effects of tax cuts cause economic growth, thereby offsetting the lower overall tax rates with increased overall tax receipts. While the short-term effect inarguably causes deficits, it is an article of faith for supply-siders that the long-term benefits of growth eventually wipe these out, creating a new economic equilibrium at a lower level of taxation.
The problem with this theory is that the long-term effects cannot be demonstrated using conventional econometric modeling. For years, advocates have been trying to get analysts to employ a process called dynamic scoring, which attempts to factor in the projected impacts of reduced taxes going forward, rather than keeping baseline assumptions in place throughout the life of the tax cut. This, they claim, would provide a better forecast of the economic picture in the “out years” and support their contention that deficits eventually shrink, rather than grow, under the supply side model. Most mainstream economists considered dynamic scoring, with its assumptions piled on assumptions, to be fundamentally unsound and simply a pretext for “proving” suspect supply side theories by cooking the books.
After years of wrangling, the Congressional Budget Office finally adopted dynamic scoring in its analysis of the Bush budget – not just on the tax side, but on the entire budget, including projected spending policy. And guess what happens to the deficit projections in the out years? Nothing. Nada. Zip. In fact, according to this report, the only scenario where the rate of growth of the deficit (not even the deficit itself!) declines in the last year of the forecast is when the model assumes tax rates would increase the following year.
Those few people who paid attention to this result immediately grasped the implications. The Senate Budget Committee's senior Democrat, Kent Conrad of North Dakota said during debate on the budget last week, "Tax cuts will make the deficit soar. I hope we can put this old canard to rest once and for all that somehow you can tax cut your way to prosperity."
Conservatives are trying to put a brave face on the findings, but the more intellectually honest among them can see the writing on the wall. With these results, there is not even the fig-leaf of theoretical support for across-the-board cuts in tax rates as a fiscally-responsible economic policy in either the long or short term. In fact, even using the supply-siders’ own preferred method of analysis, the only tax cut strategy that shows any positive effect on long-term fiscal health is targeted cuts. Somewhere Robert Rubin must be smiling.
9:13:55 AM 
|
|
