Sunday, May 14, 2006

Free Lunch

I was headed to get my five hours of sleep when I noticed an article thatKevin linked to by Sebastion Mallaby:
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.
I hope Westly doesn't try to parrot Schwarzenegger's line about tax cuts paying for themselves. The fact is, despite the increase in revenues, we still have massive structural deficits that need to be fixed. Playing to greed is irresponsible.

1 Comments:

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