Wednesday, June 22, 2011

POLITICS - Republican Zombies and Dead Ideas


"The GOP: Where dead economic ideas live on" by DAVID MILSTEAD, The Globe and Mail 6/22/2011

Zombies: Always popular. Like in the spoof “Pride and Prejudice and Zombies.” Or the television series “The Walking Dead.” Or the smelly, rotten theory that a government can actually increase its revenue by cutting its tax rates, an idea that simply won’t die.

It’s hard to find an economist, even amongst the ideologically conservative, that believes this. Yet it seems to be an article of faith among the Republican candidates for president.

Listen to Tim Pawlenty, former governor of Minnesota, as quoted this month by David Weigel in Slate: “So as people look back to the historical examples, there's been other chapters where tax cuts have been enacted, and almost always they raise revenues if you just isolate the effect of the tax cuts.”

And, he added: “When Ronald Reagan cut taxes in a significant way, revenues actually increased by almost 100 per cent during his eight years as president. So this idea that significant, big tax cuts necessarily result in lower revenues -- history does not [bear] that out.”

Mr. Pawlenty, who is, scarily, supposed to be one of the bright, rational candidates in the GOP field, forgets that Mr. Reagan engaged in some significant tax-raising in his eight-year presidency, notably the Tax Equity and Fiscal Responsibility Act of 1982.

More importantly, he disregards basic economics. This is nothing new for his party, however, as its major figures have gone on disregarding the evidence for years.

The matter was believed to be settled in 2003. Advocates of supply-side economic theory had criticized the government agencies charged with advising Congress on the implications of tax policy because they used “static” analysis that assumed budget decisions had no impact on growth.

So, early in the first George W. Bush administration, economist Douglas Holtz-Eakin took over the Congressional Budget Office and brought “dynamic” scoring to the evaluation process of the administration’s tax cuts. As Wall Street Journal columnist Alan Murray reported in April of 2003, “in no case does Mr. Bush's tax cut come close to paying for itself over the next 10 years.”

Well, we know now how that turned out. But the idea that tax cuts increase revenue continued to be part of the Republican Party’s talking points. (Senate Majority Leader Bill Frist in February, 2006: “Many people in Washington have long known a dirty little secret about tax-cut measures: When done right, they actually result in more money for the government.”

To be precise: Tax cuts create economic growth, so a planned reduction of $1 in government revenue through a tax cut will actually be less than $1 because of the offsetting impact of the growth. On this, economists agree.

That is different, very different, from saying a planned reduction of $1 in government revenue through a tax cut will be eliminated, and actually turn to a positive, because of the impact of the growth.

“While serious economists are divided on the question of whether and under what circumstances tax cuts are good for the economy, there is no such debate on the question of whether tax cuts pay for themselves,” the left-leaning Center on Budget and Policy Priorities said in 2006. “Economists from across the political spectrum reject the latter assertion.”

The Center on Budget and Policy Priorities was able to cite statements from Gregory Mankiw and Glenn Hubbard, two of the chairmen of the Council of Economic Advisers during the Bush administration, rejecting the theory.

Quotes the Center: In Dr. Mankiw’s 1998 textbook “Principles of Economics,” he said there is “no credible evidence” that “tax revenues … rise in the face of lower tax rates” and compared those who say that tax cuts can pay for themselves to a “snake oil salesman trying to sell a miracle cure.”

A perfect description, sadly, of economic policy on the campaign trail.

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