Monday, November 22, 2010

$400 billion of easy deficit reduction!!

In today's Wall Street Journal, an op-ed by Stephen Moore and Richard Vedder claims that they have done econometric research credibly establishing that, for every dollar of new federal revenues, federal spending increases by $1.17. Hence, it supposedly is a fallacy to think that tax increases can play any role whatsoever in long-term deficit reduction.

To be frank, I wonder whether this research is credible and whether its results would be replicated by researchers who don't start with their anti-tax ideological prior. After all, Congress doesn't have to have money in the "checking account" in order to spend what it wants. It has (for the moment) unlimited borrowing power anyway. Moore and Vedder also ignore the question of whether one can affect the relationship between new revenues and outlays. Proponents of VAT enactment, for example, often argue for earmarking the revenues in some way to prevent or at least soften the effect on federal outlays.

But suppose we accept their research claim as unalterably true. All one would then need to do is add the claim that it works both ways - i.e., that tax cuts likewise reduce outlays by more than dollar for dollar - and voila, one can argue that tax cuts pay for themselves, in a budgetary sense, without any need to resort to supply side arguments.

It's a good thing, too. Even leaving aside the powerful evidence against the proposition that tax cuts (from where we stand today) would actually raise revenues, the Moore-Vedder proposition should presumably leave a supply-sider queasy, if he actually believes his own empirical claim. Think of it: you cut rates, revenues go up. So far, so good. But then, darn it, spending goes up by 1.17 times the revenue increase.

No doubt it won't be long before some WSJ op-ed writer carries the idea to its logical conclusion. Maybe I should point the way?

Let's see: the President's 2010 budget totes up spending as $3.55 trillion and tax receipts as $2.38 trillion. If Moore and Vedder are right and it works both ways, all we need to do is zero out all federal revenues, and federal spending will decrease by 1.17 times the revenue loss, or $2.78 trillion.

Just think of it: No new taxes, not even any old taxes, federal revenue goes to zero, and we reduce the budget deficit by $400 billion.

I expect to see one or more WSJ op-eds flatly asserting this any day now.

1 comment:

Jeff said...

This is analysis?

So let me get this straight:
1. You reduce tax rates and increase tax revenues.

2. You prevent the Congressional con artists from hiding their increase expenditures.

This process is the same as a blatant political sham.
A. Democrats bargain for an increase in expenditures in exchange for tax rate cuts.

B. This rate cut creates more tax revenue.

C. The Democrats through CBO make up numbers about the revenue projections and expenditures that bear no sense of resemblance to reality. (Many of these expenditures are in the nature of entitlements that are not controllable.)

All I can do is quote Saturday Night Live's old news team: Really? Really?! REALLY?!

This analysis is a huge example of fallacy: post hoc ergo propter hoc, after the fact therefore because of the fact.

The two analyses bear no resemblance to each other.