Creative accounting.

Jim Pethokoukis does some analysis of the Romney tax plan. There’s a lot to like. rates fall 20%, and all three levels see decreases. Lower corporate rates. Etc.

So Jim asks the question that comes to all of our minds: How do we pay for it? And he says:

And how would Romney pay for the tax cuts? Well, the revenue would come through a combination of faster economic growth and new limits placed on deductions, exemptions, and credits—particularly on higher-income Americans.


In a brief Twitter exchange, I asked Jim directly if he thought counting on higher growth was a smart way of accounting for revenue neutrality. His response was that a lot of taxes spur growth. And that’s true. So does government spending. But the actual multiplier is an evasive figure.

I have nothing against dynamic forecasting, but we have to understand that whatever assumption you bake into your model as to the effect of marginal rate decreases on GDP is going to get scrutinized, and there’s likely to be a great deal of evidence against it simply because it’s not a settled question. That’s problematic politically, but it also means you induce a lot of uncertainty into your own policy as the cost of easier accounting.

Additionally, there are plenty of exogenous factors which can affect GDP growth. We passed the Bush tax cuts in 2001 and a tech bubble burst. They were not revenue neutral. In an alternate universe they might have spurred higher growth, but we will never see that universe. We can all speculate on what counterfactuals would look like but we will never know and we can’t experience it.

Now, it’s not easy to estimate gains from closing loopholes or higher rates or anything else, per se. There is always evasion and other externalities. People modify their behavior. But that to me means we ought to be more conservative in our assumptions, which by extension means we ought to do our accounting ceteris paribus as a means of minimizing downside risk. It also turns out that’s politically more defensible than assuming growth. Sadly, it’s less exciting to the base than sexy assumptions.

We design tax systems for both deontological and consequentialist reasons. Among them is equity, which is why we want them to be progressive and to contain as few loopholes as possible. Another is growth — the tax system should encourage the right (i.e. productive) kinds of economic behavior.

If you make the success of the tax proposal contingent on the realized gains of growth, then you are making yourself vulnerable to policy failure. If growth isn’t baked into the assumptions and you have revenue neutrality anyway, then you’re safer. Because if growth doesn’t happen, you can still say you accomplished enhanced equity without sacrificing fiscal conservatism. You’re getting some of your goals.

I harp on this because I feel that conservatives talk the talk of fiscal conservatism and low taxes but are not willing to make hard choices when those come into conflict, which undermines both of those laudable agendas.


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