Good News, Bad News

by Michael G. Franc

First, the good news: President Obama has finally embraced the controversial concept of dynamic scoring!
For those of you who shun the inside-baseball policy disputes that dominate Washington, “dynamic scoring” takes behavior into account when measuring the revenue effects of changes to the tax code. In particular, a dynamic score measures the extent to which tax cuts — say, a cut in the top rate in the tax on capital gains — may generate higher-than-expected economic growth. Because higher growth, in turn, generates higher tax receipts a pro-growth tax cut would “lose” less revenue than a so-called “static” analysis would predict.
Now for the bad news.
In the world of Obamanomics, dynamic scoring only applies to massive infusions of new government spending. That’s right. More government spending equals more economic growth. The recipients of Uncle Sam’s benevolence, we are told, recycle their subsidies into the general economy when they purchase clothes or food or lattes. This creates new economic activity (our Keynesian friends call this the “multiplier effect”). All that new economic activity, it seems, yields additional tax revenue.
The president, however, is still mum on whether there are any comparable beneficial effects to pro-growth tax relief.
Today’s New York Times describes the president’s effort to convince Congress to approve $50 billion in additional “stimulus” spending to goose the economy. This new spending would subsidize the salaries of teachers in local school districts and bail out overextended state Medicaid programs.
Most interesting is the argument he makes on behalf of this latest addition to the national debt:

Making the economic case for helping the states, Mr. Obama said that if teachers and others are laid off — his education secretary, Arne Duncan, has said that without federal aid, up to 300,000 fewer teachers would be in classrooms this fall — “it will mean more costs helping these Americans look for new work, while their lost paychecks will mean less tax revenues and less demand for the products and services provided by other workers.”

He continued, “That is why the actual cost of saving state and local jobs is likely to be 20 to 40 percent below their budgetary cost.”

Apparently all those school teachers will recycle their share of this latest stimulus back into the economy and generate enough economic activity to produce up to $10 billion in unforeseen tax revenue (unforeseen, that is, to all except those who man the economic models at the White House). Nice, eh?

How, one wonders, would these same economic models score the dynamic effects of the massive tax increases that the president and his allies on Capitol Hill have in mind for our most productive citizens? What will be the “actual cost” when millions of entrepreneurs and otherwise successful Americans encounter that new 3.8 percent tax on investment income enacted as part of Obamacare? What about the tax hike taxpayers will face next January 1st when the top rates they pay on their wages and investment income rise? And let’s not forget about the increasingly likely scenario whereby the death tax will revert to its draconian 55 percent top rate of yesteryear. There must be a dynamic effect to that little economic cold shower.

Mr. President, you may need to spend some of that $50 billion on some new economic models. And soon.

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