The Dynamic Curve
Another good day for an elected chamber was had in the United States Congress last week after the House of Representatives voted overwhelmingly in favor of ”dynamically scoring” major new tax legislation. In essence, dynamic scoring means that the likely economic consequences of tax reforms are factored in to calculations on their future revenue effects. Almost unbelievably, the Congressional Budget Office and the Joint Committee on Taxation currently use “static” revenue estimating techniques, which make the assumption that tax policy changes – regardless of their magnitude – have no impact on the economy’s performance. Under such an assumed scenario, tax cuts are inevitably going to lead to falls in revenue, which is perhaps one of the major reasons why it has become virtually impossible for Washington to have a sensible debate on the issue of tax reform. Any measure put forward by Republicans which is expected to reduce the US tax burden will merely give President Obama and Democrats the opportunity to press the buzzer labeled “fiscally irresponsible.” But you don’t need a doctorate in economics to know that a significant change to tax rules has the potential to influence the behavior of businesses, investors and workers, and ultimately change the workings of the economy itself. And this works both ways. I’ve heard it said many times by both employed and self-employed people that as they pass a higher tax threshold, and marginal tax rates surge over 50 percent, there seems little point in putting in the extra hours when only the Government seems to benefit. Conversely, it’s no coincidence that we all get excited at the prospect of a tax cut, because we won’t be punished so much for working or taking a risk, and we can spend more of our money on stuff in the shops (or going to Annabel’s). Economies are hugely complex things of course, and the variables affecting a country’s economic performance are legion; it’s not necessarily a given that governments will recoup revenues lost from a tax cut through higher economic growth. The trouble is, for Democrats, dynamic scoring smacks rather too much of Reagan-omics, underpinned as it was by the works of eminent supply side theorists like Arthur Laffer and his famous curve. But Sander Levin’s claim that tax cuts never pay for themselves surely belongs well in the past, and such attitudes may partly explain the Democrats’ dismal showing in last year’s mid-terms.