Monday, December 29, 2014

Because tax policy influences economic behavior

That's why a number of champions of economic freedom want a CBO chief who favors dynamic scoring:

In a letter sent to Republican leadership and budget committee heads Monday, representatives of 45 conservative libertarian groups wrote that the "CBO needs a new director who would use dynamic scoring more broadly, provide more transparency about models and assumptions, and constantly assess which models provided the most accurate assessments in the past so that methodologies can be refined for the future."
Douglas Elmendorf, a Democratic appointee, is the current director of the nonpartisan official budget scorekeeping agency. Republicans reportedly will not reappoint Elmendorf when his term expires in January and instead will install a budget expert more amenable to dynamic scoring, which takes into account the macroeconomic effects of tax and spending changes.
The letter's authors (correctly) assert that by not taking into account macroeconomic factors, the CBO comes to conclusions biased in favor of bigger government.

The signatories are an A-list of pro-liberty folks:

The letter was published on the site of Independent Women's Voice, a free-market women's nonprofit group. It was signed by leaders of conservative groups such as Grover Norquist of Americans for Tax Reform, Jenny Beth Martin of the Tea Party Patriots, and Michael Needham of Heritage Action, as well as by libertarians such as Lawson Bader of the Competitive Enterprise Institute.

Dynamic scoring is based on the idea that money is put to its most productive uses in the hands of those who rightfully possess it, resulting even in government having more of it:


 if a 50% tax on $100 produces $50 in revenue, then lowering the tax rate to 25% will produce $25 in revenue, as static scoring predicts, but also that individuals will work more (if it's an income tax cut) or realize more capital gains (if it's a capital gains tax cut, etc.) because they will get to keep more of their money. This changed behavior will produce an extra $100, for example, which is also taxed at $25, resulting in a total of $50 in revenue, and no loss for the state.
The history of economic growth following tax cuts, from the Kennedy tax cuts to the Reagan tax cuts to the Bush tax cuts, repeatedly shows that the static score predictions have been way off the mark (overestimating the "cost") while the dynamic score predictions have been much closer to accurate.
To put it succinctly and in proper moral perspective, it rids us of the notion that letting people keep more of what is theirs somehow "costs" the government and must be "paid for."


 


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