Fiscal Policy: More National Review Nuttiness
Deroy Murdock fills in for Lawrence Kudlow as he dons the NRO clown suit. After advocating reductions in corporate tax and capital gains tax rates, he writes:
How do we finance all this? Tax cuts tend to fund themselves, at least partially, by generating greater revenues.
Excuse me but what does he mean by partially? Let’s try a simple example based on the assumptions that we have $14 trillion in GDP being taxed at say 20% for a revenue base equal to $2800 billion. Let’s then assume we cut the tax rate to 18%. If he means that GDP will rise by 5% so there is a partial offset to the loss in the tax base, then revenues FALL to $2646 billion. For tax revenues to actually rise, we’d have to see GDP rise by something close to 11.5% – which I’d term more than a partial offset. So why does Mr. Murdock write in such a confusing way? Could it be that almost every economist would argue that the offsetting increase in GDP would only partially offset the loss in tax revenue? In fact, tax cuts that are not accompanied by spending cuts likely crowd out investment leading to less GDP growth in the long-run not more.
But then we get to Mr. Murdock’s view on government spending:
Between 2008 and 2009, spending will increase 6 percent, Heritage Foundation analyst Brian Riedl calculates. This is one and a half times the inflation rate.
So the inflation rate is around 4% and nominal spending is supposed to rise by 6%, which means we’d have an increase in spending in real terms of only 2%. That is seen by Mr. Murdock as runaway Federal spending? Compare that to the increases in real Federal spending during the Reagan years or the Bush43 years and this sounds like fiscal conservatism at its finest. Of course, this was all supposed to be an endorsement of John McCain:
John McCain gets it … McCain also pledges to veto any bill containing even one pork-barrel project.
Reducing pork-barrel spending is not going to be a solution to our deficit problem. For John McCain or Deroy Murdock to suggest it is just shows that they don’t get it at all!