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October 23, 2006

Tax Cuts

Larry Kudlow writes:

There are essentially two kinds of pay-go. One is a spending limitation that was used by the Gingrich Congress to balance the budget in the 1990s. This would be good. The other is a revenue pay-go, which is not so good. In this scenario, if the Democrats cobbled together a big-bang deficit-reduction package, large tax hikes would be put in place to meet the new deficit targets. Since Congress scores the investor tax cuts on dividends and capital gains as static revenue losses - even though the evidence shows they pay for themselves - these tax cuts would be subject to repeal or rollback.

Can anybody show me this evidence? I'm willing to see it, but my understanding is that literally every serious study belies this. For instance, the US Treasury recently released a "dynamic scoring" analysis of the tax cuts -- the precise method of analysis that should show they pay for themselves. Instead, it showed that even under the most favorable assumptions, the tax cuts would cover no more than 10% of their long-run cost. No more than 10%. For every dollar we cut in taxes, we make back a dime. That's a mighty odd definition of "paying for itself." Kash Mansori, using data from the Republican convened Joint Study Group on Taxation, made the results even starker in this graph:



So is Kudlow just a liar? Or is there some secret treasure trove of data out there that I'm not aware of?

October 23, 2006 | Permalink

Comments

No, he's just a liar. Don't worry about it. In fact, I'm surprised you'd paid any attention to Kudlow at all. Nobody I know on Wall Street does.

Posted by: JMG | Oct 23, 2006 12:25:52 PM

Yep, liar. Not even a good one.

Posted by: Antid Oto | Oct 23, 2006 12:51:41 PM

Nah, not a liar. Lying requires recognizing the difference between truth and fiction. He's just a typical conservative who believes in faith based economics.

Posted by: Ron | Oct 23, 2006 12:56:24 PM

Larry Kudlow finds the evidence in the recesses of his heart.

Posted by: Jon O. | Oct 23, 2006 12:59:22 PM

Larry Kudlow has a heart?

Posted by: hebisner | Oct 23, 2006 1:17:45 PM

Since the media is totally unwilling to call a lie a lie, perhaps we need to fashion a new word for things said that have no factual basis (or are actually counter-factual).

How about if we call these special purpose lies (the ones uttered in defense of and in promotion of idealogy at the expense of truth) a "Kudlow"?

That Kudlow word has the advantage that everyone will immediately understand its usage.

While we are at it, we can also coin another lie synonym for lies that are said for purely political purposes (like Bush saying that he has never used the phrase 'stay the course' in regard to our Iraq 'policy'). These lies are 'Cheneys'.

The GOP: the party of 'Kudlows' and 'Cheneys'. I like the sound of that.

Posted by: JimPortlandOR | Oct 23, 2006 1:38:10 PM

I don't know where to get the data, but I'd suspect that the dynamic effects of the dividend and capital gains tax cuts was somewhat higher than that of the Bush tax cuts overall.

Posted by: SamChevre | Oct 23, 2006 2:08:05 PM

Here is the actual study that the links Ezra presents talk about. Suffice it to say that the conclusions are somewhat different than what those links claim.

Posted by: Dave Justus | Oct 23, 2006 2:22:45 PM

Kudlow is a doctranaire supply sider. Like most doctranaire people, no matter what their viewpoint, they tend to tune out facts and arguments that cotradict their beliefs and conclusions.

Posted by: BC | Oct 23, 2006 2:23:35 PM

Obviously the conclusion section of the Treasury report is precisely what one would expect from a traditional marginalist model, that is,

the Treasury Department used a conventional neoclassical growth model with overlapping generations of taxpayers developed by Tax Policy Advisers, LLC.
so that, eg:
Fourth, this model assumes perfect certainty and perfect competition.

The critical point is that even this model, which is pro-tax-cut from the ground up, fails to give any support for the argument that the tax cut is self-financing.

Posted by: BruceMcF | Oct 23, 2006 2:35:54 PM

spending limitation that was used by the Gingrich Congress to balance the budget in the 1990s.

Sounds like "willful deceiver" to me. Partly for the reasons PGL gives (Clinton's tax increases led to the balanced budget), partly because it writes Clinton out of the balanced-budget story, partly because AFAICT the original PAYGO wasn't just spending rules; it "pa[id] for any new spending or tax cut with either a tax increase or a corresponding budget cut elsewhere." (Plumer). If he's blowing this much smoke on this issue, there's not too much reason to take anything else he says seriously.

It may be that capital gains tax cuts apparently produce a one-time gain in revenue followed by a loss in subsequent years, as people cash in their dividends to take advantage of the lower rate. Even if that's true, it's far from cuts paying for themselves.

Posted by: Matt Weiner | Oct 23, 2006 3:05:28 PM

Where does Furman contradict the study?

Posted by: Ezra | Oct 23, 2006 3:20:45 PM

One small point - Tax cuts don't cost.

Things that cost, cost. To cost something, one must spend something. Spending costs.

Posted by: Fred Jones | Oct 23, 2006 4:26:29 PM

Shorter Fred: My balance sheet only has outflow. Income doesn't matter.

Posted by: paperwight | Oct 23, 2006 4:42:46 PM

So if I quit my job and bum around on the beach all day it won't cost me anything? Swell!

See ya losers!

Posted by: Stacy | Oct 23, 2006 5:30:48 PM

Yes, Kudlow is a liar. He is also a political hack. Kudlow starts from a political idea and then formulates an economic theory to support it. Facts are fungible and even a dishonest study can be used as long as its conclusion supports Larry's desired policies. He was also certain that Clinton's early tax hikes would devastate the US economy.

Posted by: Marv Toler | Oct 23, 2006 7:34:32 PM

He's a liar who maybe having a cocaine flashback or something along those lines.

Posted by: Randy Paul | Oct 23, 2006 9:59:39 PM

Err, not what I remember from being the results of the study. Somewhere in the teens %ge wise for labour taxes and around 50% for capital and dividend ones.
Which makes sense, capital is more mobile internationally than labour: also, the US system of dividend taxation was absurd before: compared to just about everyone esle it was double taxation.

Posted by: Tim Worstall | Oct 24, 2006 7:41:03 AM

I would love someone to quote where Furman or Mansori misrepresents the study's conclusions. Dave thinks the conclusions were "somewhat" different and Tim seems to remember differently. As it happens, the study actually doesn't evaluate whether the cuts will pay for themselves: instead it evaluates how much growth they'll lead to, which other economists, like Furman, plugged into their trusty calculators and compared to the long-run costs of the tax.

Posted by: Ezra | Oct 24, 2006 9:36:41 AM

Income doesn't matter.

First of all, it's not income, it's REVENUE (there's a difference)and yes, revenue does matter. However, the left's choice of language calling the tax cuts a "cost" ignores spending altogether as if there is no reason to scrutinize it.

Let's say that you are up to your eyeballs in credit card debt. Is your only concern how you will get more money or do you think you should maybe address your spending habits as well?

Paperwipe apparently would only look at one side of this equation.

Posted by: Fred Jones | Oct 24, 2006 10:42:48 AM

Ezra, having actually now bothered to read what you linked to I think I was referring to a different study. Something that Greg Mankiw linked to about a month ago, looking at tax cuts on labour in general and upon capital in general, within the US economy.

These specific tax cuts which you're talking about: yeah, I could imagine they'd only recoup 10%.

One thing though: "For every dollar we cut in taxes, we make back a dime."

I'd phrase that as "For every dollar we get back in tax cuts they make back a dime".

A philosophic difference there that we might not be able to bridge: we are us out here, they are they, the government on the inside.

Posted by: Tim Worstall | Oct 24, 2006 11:52:09 AM

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