More on Taxes

Matt Yglesias found the NYT article before I did. As he points out, the article basically says that under any model, whether traditional or “dynamically scored”, the result of the Bush Economic plan is bad for the economy.

Conservatives renamed “Creationism” as “Intelligent Design”. What is “Dynamic Scoring”? It’s just the new name for the old supply-side theories. The dynamic part says that in computing the costs and benefits of a tax cut, you have to factor in the dynamic benefits of the stimulative effects that tax cuts will have on the economy (if this sound just like the old supply-side argument, that’s because it is). In the old days, the supply-siders went a step further and said that the stimulative effects would more than compensate for the lost revenue, thereby reducing deficits–an argument popularized by an aptly surnamed economist, Arthur Laffer (scroll down). See this post to see the Laffer idea in action rather than theory.

Well and good, if tax cuts are stimulative (they are), what economist could disagree with factoring in those benefits? Not me. But if you are going to do a dynamic analysis, be sure it’s complete: factor in the depressing effect that expectations of future deficits (and thus expectations of a combination of future tax increases, inflation, and higher real interest rates) have on the economy. To OMB’s credit, the article makes it look like they did factor in both of these factors. Under no model, whether Keynesian or Rational Expectations (the Dynamically Scored ones) did the net effect come out positive.

If a tax cut, perhaps a small and targeted one, could be enacted without creating expectations of future deficits, that would in fact be good for the economy. I vaguely recall someone proposing something along these lines in 2000. But he was wearing earth tones and had robotic mannerisms so nobody listened.