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CF&P Foundation: Press Release

Center for Freedom and Prosperity Foundation

For Immediate Release
Wednesday, March 19, 2008
202-285-0244
www.freedomandprosperity.org

Part III of Laffer Curve Video Series Released:
CF&P Foundation Production Critiques Flawed Revenue-
Estimating Model Used by the Joint Committee on Taxation

(Washington, DC, Wednesday, March 19, 2008)The Center for Freedom and Prosperity Foundation released its third and final video today in its series discussing the Laffer Curve.

YouTube Link to Part III:
http://www.youtube.com/watch?v=ATDzKSOQCi8

Entitled "The Laffer Curve, Part III: Dynamic Scoring" the new video builds on the discussion of theory in Part I and evidence in Part II. This final installment in the series explains how the Joint Committee on Taxation's revenue-estimating process is based on the absurd theory that changes in tax policy - even dramatic reforms such as a flat tax - do not effect economic growth. In other words, the current system assumes the Laffer Curve does not exist. Because of congressional budget rules, this leads to a bias for tax increases and against tax cuts. The video explains that "static scoring" should be replaced with "dynamic scoring" so that lawmakers will have more accurate information when making decisions about tax policy.

"This may be the most important video in our series since it shines the light of truth on the flawed revenue-estimating model used by the Joint Committee on Taxation," said Andrew Quinlan president of the CF&P Foundation.     

Part I was praised by renowned economist Art Laffer, the pioneer of the Laffer Curve when he said, "I hope it is widely viewed so that more people understand the need for pro-growth tax policy,"

Part II was called "superb!" by Donald J. Boudreaux, Chairman of the Department of Economics at George Mason University and blogger at the widely read Café Hayek.

"Stop the presses…the new Laffer Curve video is up on YouTube," said Lawrence Kudlow the host of CNBC's Kudlow & Company, nationally syndicated columnist and a former Reagan economic advisor.

The CF&P Foundation's Laffer Curve Part III video is narrated by Cato Institute Senior Fellow Dan Mitchell.

YouTube Link to Part III
http://www.youtube.com/watch?v=ATDzKSOQCi8

YouTube Link to Part II: Reviewing the Evidence
http://www.youtube.com/watch?v=YsB_rnzBA08

YouTube Link to Part I: Understanding the Theory
http://www.youtube.com/watch?v=fIqyCpCPrvU

"Our educational series videos are designed to succinctly inform the viewer about important issues," said Quinlan. "We are very pleased with the feedback and we hope our future videos on key economic issues are even more successful."

The first two CF&P Foundation educational videos were on the need to preserve tax competition and cutting the U.S.'s corporate tax rate (links below).

Link to Previous Tax Competition Video
http://www.youtube.com/watch?v=nJWLemN29Wc

Link to Previous Corporate Tax Video
http://www.youtube.com/watch?v=QSB_-g-GQCA

This new video (Laffer Curve Part III) can also be viewed on Google and the Capital Hill Broadcasting Network:

Google:
http://video.google.com/videoplay?docid=7960214372780180312&hl=en

Capital Hill Broadcasting Network
http://www.chbn.com/Clip.aspx?key=2DA6318980FF88BD

Link to ALL videos on CF&P Foundation's Web Page:
http://www.freedomandprosperity.org/videos/videos.shtml


Excerpts from the Laffer Curve III Video:

. . . we also know that tax rate increases will hurt economic performance. And since this translates into less taxable income, it means tax hikes, at the very least, do not raise as much money as politicians want.

This is common sense for people in the real world. Business owners know they would lose customers if they doubled their prices, so they would never assume that this is a realistic way to double revenue. Likewise, entrepreneurs always look for efficiencies, because they understand they can increase total profits if they can lower prices and attract more buyers.

Unfortunately, common sense is a rare commodity in Washington, and the revenue-estimating system is a perfect example. When Congress debates tax legislation, it relies on the Joint Committee on Taxation to prepare official revenue estimates. This Committee, which is controlled by politicians from the tax-writing committees, assumes that changes in tax policy have zero impact on the economy's overall performance.

I'm not making this up. The JCT even admits on its website that "the Joint Committee staff assumes that a proposal will not change total income and therefore holds Gross National Product fixed." Let's look at a couple of examples to understand what this really means. If Congress is debating a bill to double income tax rates, the Joint Committee on Taxation will assume that the economy's growth is unaffected even though such a proposal would have a crippling impact on incentives to work, save, and invest.

. . . The JCT ignores real-world evidence and instead relies on simplistic models.

This system is known as "static scoring," and for decades experts have urged the JCT to modernize their methodology so that lawmakers have more realistic information when considering tax legislation. The recommended new approach, known as "dynamic scoring," would estimate Laffer Curve effects so that revenue projections are more accurate.

. . . Here's a real-world example. Back in 1989, I worked for Senator Bob Packwood of Oregon. As the ranking Republican on the Finance Committee, he sent a letter to the JCT, asking how much tax revenue would be raised if the government confiscated every penny of income about $200,000. What did the JCT say? On your screen, you can see Senator Packwood's November 14 floor statement in the Congressional Record.

As the Senator explained, the JCT estimated that this 100 percent tax rate would collect $104 billion in 1989, rising to $299 billion in 1993. And when Senator Packwood asked the bureaucrats whether this was realistic, they gave him the same revenue estimate, but included a footnote stating "that these estimated taxes do not account for any behavioral response." This is sort of like the fiscal equivalent of "other than that, Mrs. Lincoln, how did you like the play?"

So why does this crazy system exist? There are two explanations. The charitable explanation is that dynamic scoring is difficult.

. . . Another complication is that short-run answers are probably different than long-run answers. The 2003 tax rate reductions are a good example. The attached chart shows the JCT's estimate of revenues compared to what actually happened. In the first couple of years, the JCT was pretty close. They even over-estimated the amount of revenues in 2004. But in more recent years, actual revenues have been considerably higher than the JCT estimate – presumably because lower tax rates on dividends and capital gains have improved economic growth, something the JCT makes no effort to measure.

Another challenge is disentangling the effects of other policies. If politicians raise taxes and adopt protectionist policies at the same time, the economy will be hit pretty hard, and it would be difficult to figure out which bad policy deserves which share of the blame.

. . . Let's now shift to the less-benign reason why dynamic scoring isn't being used. Simply stated, some people like the fact the current system is rigged against good tax policy. Congressional budget rules are designed to make it difficult – at least on paper – to approve legislation that increases the budget deficit. And since the JCT routinely over-estimates the revenues that can be obtained by raising tax rates and likewise exaggerates the revenues foregone when tax rates are lowered, static scoring tilts the playing field in favor of bigger government. This is why the tax-and-spend crowd is dogmatically opposed to dynamic scoring.

Let's close with an interesting observation. The Joint Committee on Taxation refuses to make its revenue-estimating model public. Instead, the JCT operates in a totally nontransparent fashion, even though we taxpayers pay their salaries and finance their so-called model. Maybe its time to peek behind the curtain and see what we're getting for our money? I suspect we won't like the answer. And I bet the defenders of the status quo are against transparency because there's no way to defend the static scoring in the cold light of day.

Link to Video:
http://www.youtube.com/watch?v=ATDzKSOQCi8

 

For additional comments:
Andrew Quinlan can be reached at 202-285-0244, andy@freedomandprosperity.org

Dan Mitchell can be reached at 202-218-4615, dmitchell@cato.org

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