Text 511, 99 rader
Skriven 2006-05-16 16:07:56 av Alan Hess
Ärende: tax cuts don't pay
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for themselves?  So says this columnist.
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The Return Of Voodoo Economics
Republicans Ignore Their Experts on The Cost of Tax Cuts

By Sebastian Mallaby
Monday, May 15, 2006; A17

Nobody serious believes that tax cuts pay for themselves, as I noted last week.
But most senior Republicans flunk this test of seriousness.

In January, George W. Bush declared that, "by cutting the taxes on the American
people, this economy is strong, and the overall tax revenues have hit at record
levels." Regrettably, this endorsement of what his dad called voodoo economics
was not a one-time oversight. The next month, Bush told a New Hampshire
audience, "You cut taxes and the tax revenues increase."

Bush is not alone in this. Dick Cheney, allegedly a serious person, asserted in
February that the "tax cuts have translated into higher federal revenues."

Bill Frist is sometimes taken seriously, not least by himself. And yet the
Republican Senate leader is capable of saying: "Many people in Washington have
long known a dirty little secret about tax-cut measures: When done right, they
actually result in more money for the government."

Chuck Grassley chairs the Senate Finance Committee and ought to know about this
stuff. But he mouths the following nonsense: "There is a mindset in both
branches of government that if you reduce taxes you have a net loss, if you
increase taxes you have a net gain, and history does not show that
relationship."

And just last week Sen. Rick Santorum (R-Pa.) celebrated the extension of the
Bush tax cuts by saying, "We've put these tax provisions in place and they've
raised money."

Okay, so let's review this issue with the help of some experts. I'd like to
cite Richard Kogan of the Center on Budget and Policy Priorities, because his
work inspired this column. But to win over reasonable conservatives, I'm going
to choose N. Gregory Mankiw of Harvard, a proponent of tax cuts who chaired the
Council of Economic Advisers in the Bush White House. Mankiw is a top-notch
economist hired by Bush and Cheney to advise them. And last year he published a
paper on how far tax cuts pay for themselves, reporting enthusiastically that
this self-financing effect is "surprisingly large."

How large, exactly? Mankiw reckons that over the long run (the long run being
generous to his argument), cuts on capital taxes generate enough extra growth
to pay for half of the lost revenue. Hello, Mr. President, that means that the
other half of the lost revenue translates into bigger deficits. Mankiw also
calculates that the comparable figure for cuts in taxes on wages is 17 percent.
Yes, Mr. President, that means every $1 trillion in tax cuts is going to add
$830 billion to the national debt.

Let's engage in what Bush might call the soft bigotry of low expectations and
cut Republicans some slack. Hey, maybe they just overlooked that Mankiw paper?
Or maybe, despite hiring Mankiw to head the Council of Economic Advisers, they
later acquired reasons to doubt his judgment? In that case they should at least
have listened to Douglas Holtz-Eakin, another conservative economist who worked
in the Bush White House and who went on to run the Congressional Budget Office.

In a study published under Holtz-Eakin's direction last December, the CBO
estimated the extent to which a 10 percent reduction in personal taxes might
pay for itself. The conclusions confirm that the free-lunch mantra is just
plain wrong. On the most optimistic assumptions it could muster, the CBO found
that tax cuts would stimulate enough economic growth to replace 22 percent of
lost revenue in the first five years and 32 percent in the second five. On
pessimistic assumptions, the growth effects of tax cuts did nothing to offset
revenue loss.

So Mankiw isn't with them. Holtz-Eakin isn't with them. Which raises a
question: When top Republicans go around claiming that tax cuts pay for
themselves, which economic authorities are they relying on? None, is the
answer. These people's approach to government is to make economics up.

The Republicans' only argument is that tax receipts have boomed in the years
since the 2003 tax cut. But the question is whether tax receipts increased
because the tax cuts worked some kind of magic or because the economy was
headed up anyway after the recession, thanks maybe to low interest rates
resulting from the Asian savings glut. Friends, the reason we have economists
is so that they can solve these puzzles for us. Ignoring their solutions is
like ignoring the judgment of medical science in favor of faith healers and
quacks.

Politicians are always speechifying about how the United States must lead the
world in research to maintain its edge. But having the world's best economics
research isn't particularly helpful if those same politicians are silly enough
to tune it out. The truth is that American business excels at turning
university research into world-beating products; the paranoia on this score is
overdone. But American government is often lousy at turning research into
policies. That's what we should fret about.

smallaby@washpost.com
+ 2006 The Washington Post Company

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