It’s Back! Tax Cuts Pay for Themselves – Dynamic Scoring Lives

No One Can Kill A Good Economic Myth

The Champions of Tax Cuts have always said they pay for themselves.  Tax cuts stimulate the economy producing economic growth, higher incomes and thus higher tax collections.  Although none have actually said it, one can picture Conservatives arguing that cutting the tax rate to zero would produce so much revenue that not only would the budget be balanced, the government would have so much money they would have to be paying taxpayers to take it away.

Texas Gov. and Republican Presidential candidate Rick Perry has resurrected this argument in his tax and spending proposal. 

Dynamic scoring should also be required for tax legislation. The current system of static scoring ignores the fact that people and companies behave differently depending on how they are taxed. Dynamic scoring would take into account the incentives of different proposed tax policies and the increased economic growth and job creation that can result from lower tax rates and long-term predictability of the tax code.

Need a translation?  Dynamic Scoring is the term used to say that tax cuts generate so much revenue that they pay for themselves.

The Wall Street Journal has taken up the cause in its editorial support for Mr. Perry’s plan.  Why?  Because on paper (and in everyone’s world that contains logic and rational thought) Mr. Perry’s plan would produce massive deficits, far more than current legislation and spending.  Here is how the WSJ explains that Dynamic Scoring babble.

One attack on a flat tax is that it won't raise enough revenue to fund the government—as if the current tax code is doing that well. But Mr. Perry and other Republicans shouldn't play this static revenue game. The flat tax is desirable precisely because of its spur to faster growth and more job creation, and the dynamic effect those would have on government revenues. The Perry campaign yesterday released a revenue analysis of its plan by John Dunham and Associates that estimated revenues of $2.781 trillion by 2014 and 19.5% of GDP by 2020 (compared to $2.3 trillion and 15.3% in fiscal 2011).

While this sounds great, those sounds can be drowned out by the facts.  Since 1980’s there have been for experiments in large changes in the tax code.  Let’s see how that worked out.

1. In 1981 the Reagan Administration pushed through a large tax cut, lowering marginal rates.  In 1982 income taxes were 9.2% of GDP.  In 1986 they were 7.9% of GDP.  Oops.

2. In 1986 tax reform further decreased marginal rates.  In FY 1987 when the new rates went into full effect income tax revenues were 8.4% of GDP.  In 1993 they were 7.7% of GDP.

3. In 1993 President Clinton, with no Republican support increased marginal tax rates on high income individuals.  Income tax revenues increased from 7.7% of GDP in 1993 to 9.7% in 2001. 

4. In 2001-03 the Bush administration decreased taxes and decreased the marginal rates.  In 2002 income tax revenues were 8.1% of GDP.  When Mr. Bush left office in 2009 income tax revenues had fallen to 6.5% of GDP.

   How does the WSJ interpret this data?  Well, this way.

All such estimates are speculative, but the point is that revenue history is on the side of the reformers.

Ok, everybody take a minute to stop laughing and let's go on.

So why does Mr. Perry and his advisors insist on this huge growth in revenues?  Because if they do not, multi-trillion dollars deficits would result.  And if Mr. Perry’s plan were put into place what would happen?  Multi-trillion dollars deficits would result.  Were you not paying attention?