Written by Daniel J. Mitchell, a senior fellow at the Cato Institute. Posted with permission from Cato @ Liberty.
I’ve commented before how the fiscal fight in Europe is a no-win contest between advocates of Keynesian deficit spending (the so-called “growth” camp, if you can believe that) and proponents of higher taxes (the “austerity” camp, which almost never seems to mean spending restraint).
That’s a left-vs-left battle, which makes me think it would be a good idea if they fought each other to the point of exhaustion, thus enabling forward movement on a pro-growth agenda of tax reform and reductions in the burden of government spending.
That’s a nice thought, but it probably won’t happen in Europe since almost all politicians in places such as Germany and France are statists. And it might never happen in the United States if lawmakers pay attention to the ideologically biased work of the Congressional Budget Office (CBO).
CBO already has demonstrated that it’s willing to take both sides of this left-v-left fight, and the bureaucrats just doubled down on that biased view in a new report on the fiscal cliff.
For all intents and purposes, the CBO has a slavish devotion to Keynesian theory in the short run, which means more spending supposedly is good for growth. But CBO also believes that higher taxes improve growth in the long run by ostensibly leading to lower deficits. Here’s what it says will happen if automatic budget cuts are cancelled.
Eliminating the automatic enforcement procedures established by the Budget Control Act of 2011 that are scheduled to reduce both discretionary and mandatory spending starting in January and maintaining Medicare’s payment rates for physicians’ services at the current level would boost real GDP by about three-quarters of a percent by the end of 2013.
Not that we should be surprised by this silly conclusion. The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it was followed by record levels of unemployment.
But I think the short-run Keynesianism is not CBO’s biggest mistake. In the long-run, CBO wants us to believe that higher tax burdens translate into more growth. Check out this passage, which expresses CBO’s view the economy will be weaker 10 years from now if the tax burden is not increased.
…the agency has estimated the effect on output that would occur in 2022 under the alternative fiscal scenario, which incorporates the assumption that several of the policies are maintained indefinitely. CBO estimates that in 2022, on net, the policies included in the alternative fiscal scenario would reduce real GDP by 0.4 percent and real gross national product (GNP) by 1.7 percent. …the larger budget deficits and rapidly growing federal debt would hamper national saving and investment and thus reduce output and income.
In other words, CBO reflexively makes two bold assumption. First, it assumes higher tax rates generate more money. Second, the bureaucrats assume that politicians will use any new money for deficit reduction. Yeah, good luck with that.
To be fair, the CBO report does have occasional bits of accurate analysis. The authors acknowledge that both taxes and spending can create adverse incentives for productive behavior.
…increases in marginal tax rates on labor would tend to reduce the amount of labor supplied to the economy, whereas increases in revenues of a similar magnitude from broadening the tax base would probably have a smaller negative impact or even a positive impact on the supply of labor. Similarly, cutting government benefit payments would generally strengthen people’s incentive to work and save.
But these small concessions do not offset the deeply flawed analysis that dominates the report.
But that analysis shouldn’t be a surprise. The CBO has a track record of partisan and ideological work.
While I’m irritated about CBO’s bias (and the fact that it’s being financed with my tax dollars), that’s not what has me worked up. The reason for this post is to grouse and gripe about the fact that some people are citing this deeply flawed analysis to oppose Obama’s pursuit of class warfare tax policy.
Why would some Republican politicians and conservative commentators cite a publication that promotes higher spending in the short run and higher taxes in the long run? Well, because it also asserts – based on Keynesian analysis – that higher taxes will hurt the economy in the short run.
…extending the tax reductions originally enacted in 2001, 2003, and 2009 and extending all other expiring provisions, including those that expired at the end of 2011, except for the payroll tax cut—and indexing the alternative minimum tax (AMT) for inflation beginning in 2012 would boost real GDP by a little less than 1½ percent by the end of 2013.
At the risk of sounding like a doctrinaire purist, it is unethical to cite inaccurate analysis in support of a good policy.
Consider this example. If some academic published a study in favor of the flat tax and it later turned out that the data was deliberately or accidentally wrong, would it be right to cite that research when arguing for tax reform? I hope everyone would agree that the answer is no.
Yet that’s precisely what is happening when people cite CBO’s shoddy work to argue against tax increases.
It’s very much akin to the pro-defense Republicans who use Keynesian arguments about jobs when promoting a larger defense budget.
To make matters worse, it’s not as if opponents lack other arguments that are intellectually honest.
- They could point out that higher marginal tax rates discourage productive behavior.
- They could point out that increased double taxation of saving and investment will hurt workers by reducing capital formation.
- They could point out that a larger tax burden will encourage a bigger burden of government spending.
- They could point out that revenues almost surely be less than what is projected because of the Laffer Curve.
So why, then, would anybody sink to the depths necessary to cite the Congressional Budget Office?