The vice president holds forth on the elasticity of tax receipts with respect to the tax rate.
Vice President Cheney last week stated, according to Reuters:
“Nobody’s perfect, but when revenue projections are off by 180 degrees, it’s time to reexamine our assumptions and to consider using more dynamic analysis to measure the true impact of tax cuts on the American economy,” he said in a speech to the American Conservative Action 2006 Conference.
This view is, apparently, the motivation for the President’s proposal for a new unit in the Treasury Department to implement dynamic scoring. From the Washington Post:
Treasury officials said yesterday that the president’s proposed Division on Dynamic Analysis — with a handful of employees and a $513,000 budget — would go beyond the government’s old “static” methods of analyzing proposed changes in tax policy only in terms of their direct effects on certain affected taxpayers. Instead, “dynamic” analysis looks at how tax changes cause consumers and businesses to behave differently in ways that affect the overall economy’s growth.
Dynamic scoring makes intellectual sense. And in proper hands, and with proper deference to our uncertainty regarding the correct model and model parameters, it can be a useful approach. Indeed in the CBO’s analysis of the President’s proposals in 2003, the results of dynamic scoring were reported (although not incorporated in the official forecasts). As it turned out, half of the estimates from the “dynamic” models implied higher revenue losses than those from static models criticized by the Vice President.
Of course, if there is dynamic scoring of tax revenues, then for the sake of consistency, spending measures should be also scored. Even in real business cycle models with Ricardian equivalence, spending has effects (usually depressing economic welfare in RBC models).
So dynamic scoring, in the hands of a professional staff cognizant of the extent of model uncertainty, well insulated from political pressures, would be a good thing. However, WMDs, “last throes of the insurgency”, and the “Clear Skies” initiative, might give an impartial observer pause for thought.
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dynamic scoring
I agree that there is nothing wrong with an honest attempt at dynamic scoring, but for an adminstration with a record of censoring and rewriting the reports of scientists on global warming, overruling doctors conclusions on the safety of RU-486, and threatening to fire career professional economists who might reveal the true cost of prescription Medicare, dynamic scoring is just an opportunity to skew the facts toward a predetermined outcome. They could save a lot of time and expense by skipping the analysis part and just having Larry Kudlow and Donald Luskin write up the conclusions.
The only problem I have with dynamic scoring and the Laffer curve is that the underlying idea is that the human population is a farm of economic capital owned by the government, and that the government’s proper goal is to maximize the amount of resources it extracts from its capital. Is the abstract maximization of tax revenue really a proper goal in a free society, as it might be in a slave state?
An Impartial Observer Might Have Pause for Thought
Brad DeLong has the Dead-Eye Dick Cheney story covered and I presume the divergence between highly misleading initial reports and subsequent developments will get adequate coverage as well, so here’s another of Cheney’s recent activities. Menzie Chinn …
If the attempts at dynamic scoring could be taken away from the government they would be good things. Do I need to say the rest? Reagan started it but never used it except as a campaign issue. Clinton used it to help the Republican Congress reduce the reported deficit. Bush wants to use it to reduce taxes.
The prioblem isn’t one of revenue, it is one of spending.
I think it’s hilarious that Dead Eye Dick would complain about someone being off 180 degrees!!!!
Maybe he was using dynamic aiming while he was out hunting!
I tink we all know that this unit is going to be staffed with 22-year-olds fresh from the Young Republicans, whose job will be to provide an analysis “proving” that massive tax cuts for the rich actually bring in more money to the United States and provide free ponies for everyone. Why even discuss what might happen if honest professionals were employed to do honest work? That’s not going to happen, and you know it.
The title of the post is scary.