Perhaps the greatest myth in the Republican pantheon is the claim that "tax cuts pay for themselves." Sadly, that article of supply-side faith—that tax cuts fuel economic growth so explosive that federal revenue exceeds what otherwise would have been collected—has been painfully debunked by decades of history. Unfortunately, as part of the budget deal just completed by Congress, Republicans quietly ensured that such "dynamic scoring" would become part of future analyses by the nonpartisan Congressional Budget Office (CBO). If the GOP succeeds, voodoo economics will henceforth be a feature, not a bug.
That's the word from Politico, which reported that Republicans scored a symbolic victory when "the Senate told the Congressional Budget Office it should give more credit to the economic power of tax cuts." Thanks to the support of six Democratic senators including Mark Begich of Alaska, Kay Hagan of North Carolina, Heidi Heitkamp of North Dakota, Tim Kaine of Virginia, Joe Manchin of West Virginia, and Claire McCaskill of Missouri, former Bush OMB chief Rob Portman was able to secure the passage of an amendment asking the CBO to cook the books:
The amendment endorsed a model called "dynamic scoring," which assumes that tax cuts will pay for at least part of their cost by generating more economic activity. The measure by Sen. Rob Portman (R-Ohio) called on CBO and the Joint Committee on Taxation to include "macroeconomic feedback scoring" in all future estimates of tax legislation.As James Valvo, policy director at Americans for Prosperity, put it, "This is something that remains important to us."
Important, with good reason. After all, to one degree or another, pretty much every major Republican tax cut scheme from Reagan in 1980, Dole in 1996 and Bush in 2000 to Mitt Romney in 2012 and Paul Ryan's "Path to Prosperity" budget have claimed that the hemorrhage of revenue for the U.S. Treasury from their massive tax cut windfalls for the wealthy would theoretically be offset by bigger collections from a supposedly surging economy. Without resorting to the sleight of hand that is dynamic scoring, these GOP budgets invariably produce red ink as far as the eye can see. That's why House Republicans last proposed H.R. 3582 (the "Pro-Growth Budgeting Act") to require that the CBO estimates also use dynamic scoring to incorporate "supply-side assumptions about the growth-generating magic of tax cuts into official budget estimates, enabling conservatives to evade the deficit-boosting implications (and various congressional barriers that come along with them) of their pet proposals for reducing the tax burden of 'job creators.'"
Most analysts have encouraged the Congressional Budget Office and other forecasters to steer clear of dynamic scoring for two very compelling reasons. First, there's no consensus on how to model it, making the process ripe for manipulation and political chicanery. As former deputy assistant director for tax policy at the Congressional Budget Office and current fellow at the Tax Policy Center Roberton Williams warned:
"We really don't understand the science well enough to do it right. The assumption built into the model determines, in large part, what comes out of the mode. There's going to be conflict unless there's some agreement on what ought to go in."But it's not just that "there's a great deal of uncertainty" about "the right way to model things," as TPC's Donald Marron put it. There's also the matter of the historical record: For over 30 years, bogus conservative claims about the revenue-increasing effects of tax cuts have been proven cataclysmically wrong. Continue reading below the fold to find out why.
Starting, it turns out, with Ronald Reagan. As most analysts predicted, Reagan's massive $749 billion supply-side tax cuts in 1981 quickly produced even more massive annual budget deficits. Combined with his rapid increase in defense spending, Reagan delivered not the balanced budgets he promised, but record-setting debt. Even his OMB alchemist David Stockman could not obscure the disaster with his famous "rosy scenarios."
Forced to raise taxes eleven times to avert financial catastrophe, the Gipper nonetheless presided over a tripling of the American national debt to nearly $3 trillion. By the time he left office in 1989, Ronald Reagan more than equaled the entire debt burden produced by the previous 200 years of American history. It's no wonder that, three decades after he concluded "the supply-siders have gone too far," former Arthur Laffer acolyte and Reagan budget chief David Stockman lamented:
"[The] debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party's embrace, about three decades ago, of the insidious doctrine that deficits don't matter if they result from tax cuts."When George W. Bush and Dick Cheney ambled in the White House in January 2001, they weren't shy about making that same point. As Vice President Dick Cheney famously declared in 2002, "Reagan proved deficits don't matter." (Not, that is, unless a Democrat is in the White House.)
Inheriting a federal budget in the black and CBO forecast for a $5.6 trillion surplus over 10 years, President George W. Bush quickly set about dismantling the progress made under Bill Clinton. In 2001, Bush signed a $1.4 trillion tax cut, followed by another $550 billion round in 2003, the first war-time tax cut in modern American history. (It is more than a little ironic that Paul Ryan at the time called the tax cuts "too small" because he believed the estimated surplus Bush would later eviscerate would be even larger than predicted.) In keeping with Republican orthodoxy that "tax cuts pay for themselves," President Bush confidently proclaimed:
"You cut taxes and the tax revenues increase."As it turned out, not so much.
Federal revenue did not return to its pre-Bush tax cut level until 2006 (see chart at top). As a share of American GDP, tax revenues peaked in 2000; that is, before the Bush tax cuts of 2001 and 2003.
Analyses in 2010 by the Center on Budget and Policy Priorities concluded, the Bush tax cuts accounted for half of the deficits during his tenure, and if made permanent, over the next decade would cost the U.S. Treasury more than Iraq, Afghanistan, the recession, TARP and the stimulus—combined. By the time he shuffled out of the Oval Office in January 2009, President Bush bequeathed a $3.5 trillion budget and a $1.2 trillion annual deficit to his successor, Barack Obama.
It's worth noting that current conservative economic propagandist and former McCain economic adviser Douglas Holtz-Eakin couldn't make the dynamic scoring alchemy work for the Bush administration:
In 2003, Doug Holtz-Eakin was appointed by Republicans to lead the CBO during the Bush years, and he came under intense pressure to use more dynamic analyses. But studies he commissioned found that dynamic scoring was devilishly complicated and wouldn't lead to drastically different estimates. As he explained in a 2011 hearing before the House Ways and Means Committee, "it is unlikely to change the bottom line very much over the budget window."Despite the bitter experience of the Bush years, Mitt Romney made the same GOP shell game part of his tax plan in 2012. As Ezra Klein suggested in "The Dynamic Dodge in Romney's Budget," Mitt's scheme once again resurrected David Stockman's "magic asterisk":
As a matter of theory, stronger economic growth could make Romney's plan work...if Romney really could double or triple the pace of economic growth, it would be much easier to make his numbers add up...As it turns out, Romney's 20 percent tax cut plan is basically the same one Bob Dole ran on—and lost on—in 1996. And the architect of that debacle, former Reagan Treasury official Bruce Bartlett, has long since recanted his support for the "dynamic scoring" at the heart of virtually every Republican tax plan. As Bartlett put it last year:
The technical term for the secret sauce that Romney is using in his budget projections is "dynamic scoring." The idea is that tax cuts make the economy grow faster. They make people work harder. They persuade rich people to stop hiding money away. And thus they don't cost as much as a "static analysis" -- one that didn't take into account all these effects -- would suggest.
As the budget deficit increasingly inhibits Republicans' tax-cutting, they are planning ahead for tax cuts that they will insist are costless because they will so massively increase growth. But for that approach to work, the C.B.O. and the Joint Committee on Taxation, Congress's official budget and tax estimators, need to be forced to play along...With Rob Portman's amendment tacked on to the FY13 continuing resolution, Republicans took one step towards making their tax cut smokescreen standard operating procedure.
My concern is that the Republican effort is just a smokescreen to incorporate phony-baloney factors into revenue estimates to justify unlimited tax cutting...In other words, it is an issue of credibility. Republicans don't really care about accurate revenue estimates; they just want them to show that tax cuts pay for themselves, so they can pass more of them without constraint.