One of Steve Forbes‘ latest contributions to Forbes magazine focuses on the need to address a congressional bias toward more taxes.
ONE OF THE MAIN TASKS of the new Republican Congress will be to change fundamentally how the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) evaluate the impact that changes in the tax code have on budget revenues and economic growth. For as long as anyone can remember, the CBO has employed static scoring, which essentially assumes that reductions in tax rates have very little impact on economic growth and simply reduce the government’s tax revenue. It doesn’t take a Sherlock Holmes to deduce that this methodology is biased against tax cuts.
Back in the late 1980s a U.S. senator asked the JCT to calculate the impact of a 100% income tax. Like robots, the agency concluded that such a tax would bring in a gusher of revenue.
Notoriously, the CBO has always abysmally underestimated the revenue impact of reductions in the capital gains tax. This is one levy in which a cut immediately brings in more money, if only from those investors deciding to cash in on some unrealized gains. Reluctantly, the CBO has granted that more cash might flow in from a rate cut but then has declared that this would take revenue from the future! The same warped approach has been applied to reductions in the tax rates on personal and corporate incomes: The timing of economic activity may change, but really nothing much in substance would be altered.
The CBO also assumes that government spending stimulates economic growth. Early in the Obama presidency former Treasury Secretary Larry Summers, then a White House economic official, won notoriety by proclaiming how much of a “multiplier effect” various kinds of outlays would have on economic growth, i.e., a dollar in this program would beget $1.30 in extra growth, a dollar in that program, $1.70.
This is nonsense. The government gets resources from people who produce them; spending this money for politically favored projects more often than not saps economic vitality.