Tax Cuts Uber Alles

How Republicans plan to cook the books if they win in November.

Photo by John Gress/Getty Images
Rep. Paul Ryan is interviewed by former running mate Mitt Romney at the Union League Club of Chicago on Aug. 21, 2014. 2012 has come and gone, but maybe 2014 will give Ryan the power he wants.

Photo by John Gress/Getty Images

Last month, in a speech to the Financial Services Roundtable, GOP budget guru Rep. Paul Ryan floated a few ideas for the prospective Republican Senate majority. “Our rules in Congress require that we don’t take into consideration behavioral changes or economic effects as a result of tax reform,” he said. “What we want to do is change our measurement.”

This is worth a little explanation. Typically, when lawmakers want to know the costs and benefits of a tax proposal, they take it to the Congressional Budget Office for a “score.” To do this, the CBO projects forward from the proposed policy without accounting for feedback effects or changes to the economy caused by the proposal itself. As the office explains, “CBO’s cost estimates generally do not reflect changes in behavior that would affect total output in the economy, such as any changes in labor supply or private investment resulting from changes in fiscal policy.” That is called static scoring. What Ryan wants is a process called dynamic scoring—that does the opposite: It estimates the effects of a new policy on the economy itself, and uses that to make projections on the eventual costs and benefits of the policy.

The main problem with dynamic scoring is it’s extremely difficult to do it with real accuracy. To make a fair estimate with dynamic scoring, you have to make big assumptions about a policy and its relationship to the broader economy. And given countless moving parts in a modern economy, it’s hard to do this without adding bias, ideological or otherwise. For the CBO and other mainstream analysts, it’s more reliable to give a static score of the direct effects of a policy and leave it at that.

For Ryan, however, the fuzzy imprecision of dynamic scoring is a point in its favor. Like the late Jack Kemp—his former boss and mentor—Ryan has a firm belief in supply-side economics, which sees a tight connection between marginal tax rates and economic growth. On its own, this isn’t controversial. Economists have long said that—depending on circumstances—high tax rates can have a negative effect on growth.

But supply-side adherents go further to argue that low taxes always spur enough employment, investment, and growth to expand the tax base and grow revenue beyond the size of the tax cut. To Ryan, and many others in the Republican Party, you can have your cake (and pie and barbecue) and eat it, too.

Dynamic scoring is key to the supply-side case. With the right assumptions, a dynamic score can make tax cuts the free lunch of public policy. For example, in his 2012 Path to Prosperity, Ryan said that his tax cuts and budgetary policies would create “nearly 1 million new private-sector jobs,” bring the unemployment rate down to “4 percent by 2015,” and increase “real GDP by $1.5 trillion over the decade.” The proof? A dynamic score calculated by the right-wing Heritage Foundation.

Indeed, like snake oil salesmen at a medicine show, conservatives have long used dynamic scoring to make extraordinary claims about the alleged power of tax cuts. As a candidate for the 2012 Republican presidential nomination, Texas Gov. Rick Perry proposed a $1 trillion tax cut as a cure for the sluggish economy. “Gov. Perry is confident that the economic growth that results from this plan will generate the necessary revenue to balance the budget by 2020,” said the campaign in an interview with the Washington Post, citing its dynamic score for the plan. According to an independent analysis, however, the Perry plan would have been a huge revenue loser, starving the government of tax dollars and forcing cuts to a wide variety of programs.

Likewise, Republicans used dynamic scoring to sell the 2003 Bush tax cuts as a lunch that would pay for itself—the tonic for a slow-moving economy. “The president’s growth package will reduce the tax burden on the American people by $98 billion this year, $670 billion over the next 10 years,” said Vice President Dick Cheney. “But the actual impact on the deficit will be considerably smaller than the static projections, because the president’s package will generate new growth, it will expand the tax base, and thus increase tax revenue to the federal government ultimately.”

Of course, none of this happened. Far from broad-based gains, the Bush tax cuts added trillions to long-term debt, worsened economic inequality, and set the stage for the next five years of sluggish growth, culminating in a massive recession. Despite this example, Republican governors like Kansas’ Sam Brownback have embarked on an orgy of supply-side tax cutting, and congressional Republicans have pushed bills to establish dynamic scoring for the Congressional Budget Office. (In fairness, a handful of Democrats joined Republicans to do the same in 2013, giving bipartisan cover for the bad idea.)

Which brings us back to Paul Ryan. For the House Budget Committee chairman, it’s still tax cuts uber alles—for his most recent budget, he proposed a whole new round of tax cuts, along with huge reductions to spending on low-income Americans. The only way to make this work as public relations—let alone policy—is to paint a picture of prosperity and success. Give us these tax cuts, the argument goes, and we’ll supercharge the economy with growth.

For this, dynamic scoring is necessary. And so, if Republicans win control of Congress, we can count on a few years of nonsense numbers, as the GOP sells bad policies with wishful thinking.