Yes It’s Just Math – But The Rub Is In The Formulas

Here is an example of the type of campaign argument that frustrates the hell out of voters.  The topic is tax policy, specifically the liberals’ accusation that Romney’s tax plan is a $5 trillion tax cut for the wealthy.  Starting at the 0:49:53 point in the October 11th VP Debate:

BIDEN: Now, there’s not enough — the reason why the AEI study, the American Enterprise Institute study, the Tax Policy Center study, the reason they all say…taxes [will] go up on the middle class, [is] the only way you can find $5 trillion in loopholes is [to] cut the mortgage deduction for middle-class people, cut the health care deduction [for] middle-class people, take away their ability to get a tax break to send their kids to college. That’s why they arrive at it.

RADDATZ: Is he wrong about that?

RYAN: He is wrong about that. They’re…

BIDEN: How’s that?

RYAN: You can…cut tax rates by 20 percent and still preserve these important preferences for middle-class taxpayers…

BIDEN: Not mathematically possible.

RYAN: It is mathematically possible. It’s been done before. It’s precisely what we’re proposing.

BIDEN: It has never been done before.

RYAN: It’s been done a couple of times, actually.

BIDEN: It has never been done before.

RYAN: Jack Kennedy lowered tax rates, increased growth. Ronald Reagan…

BIDEN: Oh, now you’re Jack Kennedy?

There were similar arguments between President Obama and Governor Romney in their debates, with a bit less interrupting and belligerence.

So what gives here?  Clearly each side thinks they’re correct, but they may as well be describing two different worlds.  Well, essentially they are, because they’re operating from two different world visions.

Here’s my take on this economic philosophy disagreement.

First I’ll slay a myth so it doesn’t get in our way:  “Economists are politically objective mathematicians and accountants that mostly agree.”  DON’T KID YOURSELF.  Any country’s economy and its politics are intertwined.  It can’t be any other way, since a government’s policies play a big part in determining the country’s economic conditions.  Agree?  So it naturally follows that there’s no such thing as a perfectly non-political economist.  The field of Economics is not a purely objective science.  I’m sure you’ve noticed that my economic views are an inseparable part of my political views.  Guess what?  So are yours.  It’s ALL politics, underpinned by ideology.

The idealistic economic vision favored by liberals is based on one of their primary beliefs about human nature:  People will work just as hard for the benefit of unknown strangers — beneficiaries of the vigorous federal entitlement system — as they will for the benefit of themselves and their own family.  Therefore, it follows that liberals are bound to the belief that incentives and disincentives don’t much matter – that our economy is influenced only by simple one-step causes and effects.  To acknowledge otherwise would torpedo their own ideology.

By contrast, Romney’s economic plan is based on a realistic vision of human nature: Incentives and disincentives matter, and our economy will naturally increase jobs and wages if citizens are given the prospect of a higher take-home pay because of lower tax rates.  As the economy returns to a healthy growth rate by getting annual GDP growth back up to 5% or more, the government soon sees increased tax revenues despite the lower tax rates – in fact BECAUSE of the lower tax rates.

This ideological difference was starkly visible in all four debates.

Here are two acronyms defined:  CBO stands for the “Congressional Budget Office,” which is Congress’s financial analysis office.  OMB stands for the “Office of Management and Budget,” which is the White House’s financial analysis office.

Both the CBO and the OMB, as well as other liberal-leaning economists, use economic formulas that only compute the first-level effects of changes in tax rates and tax laws.  This type of fiscal analysis is called a “static model.”

As you can see here (in the upper right), U.S. federal revenues are about $2.5 trillion this year.  Using a “static model,” liberal-leaning economists compute that if the government’s tax rate is lowered by 20% under Romney’s plan, the government revenues will drop $500 billion per year, or a $5 trillion drop over 10 years.

But the OMB’s and CBO’s near-sighted fallacy is that their formulas don’t include any recognition of the secondary and thirdary benefits that lower tax rates would have on the strength of each household and company in the American economy.  Isn’t it just common sense that the economy would grow faster?  And isn’t it obvious this is what we need right now?

The OMB, CBO, and other liberal economists don’t bother trying to apply a “dynamic model” that shows what happens to the economy when lower tax rates leave more dollars in the hands of savers, investors, and employers.  Why don’t they bother?  I don’t know, but it’s a sham that is well known among people who monitor and critique government fiscal policies.  I strongly feel the OMB and CBO charters must be reformed.  After decades of this purposeful malpractice, it’s impossible to count how many crappy government decisions, and misinformed voter decisions, have been based upon these ridiculous “static model” analyses.

In closing, I remind you how fiscally important this election is.  I know economics makes most people’s eyes roll up in their head, but c’mon…this is crucial, folks!  Armed with my brief explanation of “static models” vs. “dynamic models,” I urge you to go read just 2 pages of Romney’s plan for yourself, uninterrupted by Joe Biden.  Please go to this link, click on “Full Plan”, and focus on the “dynamic model” discussion on pages 6 and 7.

http://www.mittromney.com/jobsplan

.

(graphic credit)

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About Necessary and Proper

Jeff believes in the Individual's ability to excel when liberty and freedom of choice are protected. Also believes in the Community's ability to take care of the vast majority of its own issues and needs when the federal government leaves the Community's resources and sphere of control alone. State and local choice produce better results than centralized federal control. https://necessaryandpropergovt.wordpress.com/
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7 Responses to Yes It’s Just Math – But The Rub Is In The Formulas

  1. “First I’ll slay a myth so it doesn’t get in our way: “Economists are politically objective mathematicians and accountants that mostly agree.” DON’T KID YOURSELF.”

    I’m very glad you pointed this out. When I see things like, “From the non-partisan group…” in reference to economic discussions, I roll my eyes. Economists are some of the most partisan people out there! Economics is intertwined so closely with politics that even distinguishing the line between them is sometimes difficult. Even if a group as a whole could be considered “non-partisan”, the individual economists within it have their own views, and will interpret the information through that lens.

    I will say, though, that even liberal economists will say that incentives matter; I think that they would just say that on the margin tax rates won’t have a big enough effect that they will inhibit production. Personally, I don’t believe that it’s been proven that we’re actually on the back side of the Laffer curve and that lowered taxes would actually increase revenue at this stage of the game, but I’m open to any evidence countering that view. I would like to see spending reduced in conjunction with lowered tax rates, and not simply lowered taxes with unchanged rate of spending.

    From the linked jobs plan:
    “Our key finding isthat the best fiscal policy to stimulate the economy is a deficit-financed tax cut and that long-term costs of fiscal expansion through government spending are probably greater than the short-term gains.” (See Andrew Mountford and Harald Uhlig, “What Are the Effects of Fiscal PolicyShocks?,” CEPR Discussion Paper, July 2005.)”

    I agree with this to a point- individuals are probably going to spend their money more effectively than the government would, but it’s still increasing the deficit by their own admission, which burdens future taxpayers with higher taxes, higher inflation, or a combination of both.

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    • EC,

      I put the myth buster about economists into the article because as I was writing, I was hearing the rebuttals that would come raining down on me about how the OMB and CBO are non-partisan, and how the zillions of economic studies are non-partisan…bla bla bla. Just didn’t want to deal with it, so I put the lie to it in advance.

      For individuals’ income tax rates (non business), I do not personally have my finger on evidence that we’re on the point of the Laffer curve that says the tax rates are grossly high. So I can’t provide the evidence you called for. But I certainly don’t want tax rates to go HIGHER than they are now, and I’ll bet you don’t either. Conceptually speaking, I can stay calm if my income tax rate stays below 1/3. It’s supposed to go up to 31% next year for my household, which is pushing it pretty close. For me, there’s something about the principle of being able to keep at least twice as much of my hard-earned money as the federal government takes away.

      I absolutely agree with you that spending needs to be cut. I’m for a balanced budget amendment to the U.S. Constitution, but not balanced at the elevated levels of spending that exist now. I read all of Romney’s plan, not just 2 pages, and somewhere in it I know it recommended getting spending down to about 20% of GDP. I emphatically concur. That is a feasible level that can be matched by tax revenues in most years.

      Here’s something I left out, but I want to write about it in a future article. The biggest thing I’d like to see is a further extension of what Romney is trying to achieve. He wants to lower tax rates by 20% so that all the small businesses that pay their business taxes at the same rate as their owner’s personal income tax rate can be left with more business earnings so they can hire more workers to expand their businesses. I agree. But since the individual and small business tax rates are joined at the hip in the crazy friggin’ tax code we have now, Romney’s plan opens him up to demagoguery from the liberals that he’s giving wealthy people a tax break. I’m sick of the two tax rates (individual income, and small business income) being the same. I’ve been advocating for a couple years now for those to be split up and handled separately by the IRS. I’ve said it at my Congressional representative’s town hall meetings, and I’ve sent him emails about it. Lobbying that way is like trying to fill the ocean with an eye dropper. But do you get my point? It would separate the two subjects, so that neither could be used to hold the other hostage, or be used to demagogue the other. Let small business tax rates be optimized for the best economic boost possible, and let individual tax rates be kicked around like a political football in the stadium of class warfare. Whatever…. I guess it reveals that I believe class-warfare-based arguments over personal income tax rates will go on forever. But small business tax rates should be treated like innocent bystanders in that war.

      (As long as this reply has become, maybe I don’t need to write a separate article on small business tax rates. 🙂 )

      Something else I didn’t include in the article itself because it grew too long is that I frankly wish Romney would come out with a few more particulars about what loopholes and deductions he would at least SUGGEST be eliminated. I understand that he wants to allow those details to be debated fairly by Congress, but by not at least offering up a HYPOTHETICAL example now, he sure leaves himself open to a blunderbuss of criticism from the likes of Jokin’ Joe Biden. Perhaps Romney is thinking that no matter what he says about his plan, the expert liberal speech/spin writers and PAC advertisers on the other side of the contest will attack it…so he may as well just leave it vague. It’s the same reasoning he used to decide not to release any more tax returns — just feeds ammo to the opposition, no matter what’s in them.

      Finally, you spotted one of the few phrases in Romney’s plan that I didn’t like too much either. I was barely “OK” with it because I believe what they meant by a “deficit-financed tax cut” is only for a period of about 2-3 years, not longer term — since I agree with you that I certainly don’t want to keep adding to the immoral growth of debt that our grandkids are going to hate our guts for. I believe if the economy starts getting fully healthy, and if the government’s policies settle down to being more predictable and worthy of business owners’ confidence, that such a positive environment would start causing the GDP growth needed to pay back the initial revenue loss from the tax rate cut. I haven’t studied the Reagan-era tax rate cut example closely enough to see how long it took for the enlarged size of the whole economic pie to offset the smaller-PERCENTAGE slice that the government collected, resulting in the net gain in tax revenues that occurred. Have you? My recollection is that it took about 3-4 years to pay for itself, and the momentum of the boom lasted through Clinton’s terms, providing a long-term reward for all of us. God bless Ronnie.

      – Jeff

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  2. Nice article and comments.

    I’m going to agree and disagree, based on exactly what you suggest in your article, ie. competing world views.

    Actually “economics” is non-partisan from the standpoint of objective reality. As you mention in your article, what makes the discussions political is the introduction of liberal “theory” as a valid topic of economic/political discourse.

    As I attempt to point out whenever the left/right divide becomes a matter of discussion. It is ALL about world view, and the fact that the left simply makes their’s up from whole cloth. 1 + 1 = 2 is not, to my mind, a “conservative” position and yet we find analogous examples where liberals make that claim all the time.

    The exchange you highlight above is a perfect example of the lack of clear thinking from the left. What did Biden have to offer? The only way for liberals to “win” is for them to refuse to agree that there is any real answer, which is why they are always “against” and never “for” based on the facts.

    The evidence always shows the intellectual dishonesty and moral bankruptcy of the left’s positions.

    Basic math and basic economic theory are anathema to any left-leaning economist or politician as their positions oppose reality.

    For example, they seem unable to understand the concept of increasing sales by lowering the price of a product and thus improving net profit.

    I often see this when discussing wages, particularly at the union level, where members would rather work 8 hours a week at $50.00 an hour for a grand total, excluding taxes, of $400.00 rather than 40 hours a week at $25.00 an hour which nets them $1000.00, excluding taxes while complaining that there is no work.

    Just some quick thoughts…

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    • I agree. As Thomas Sowell states, realistic economics is indeed the “dismal science.” However, it works…if the intelligentsia will leave it alone long enough to let it do so. 🙂 Great thoughts!

      Like

      • Thanks for the comment, David.

        Since you bring up Thomas Sowell, here’s an appropriate passage from Chapter 1 of his 2003 book Applied Economics — Thinking Beyond Stage One:

        “When we are talking about applied economic policies, we are no longer talking about pure economic principles, but about the interactions of politics and economics. The principles of economics remain the same, but the likelihood of those principles being applied unchanged is considerably reduced, because politics has its own principles and imperatives. It is not just that politicians’ top priority is getting elected and re-elected, or that their time horizon seldom extends beyond the next election. The general public as well behaves differently when making political decisions rather than economic decisions. Virtually no one puts as much time and close attention into deciding whether to vote for one candidate rather than another as is usually put into deciding whether to buy one house rather than another — or perhaps even one car rather than another.

        “The voter’s political decisions involve having a minute influence on policies which affect many other people, while economic decision-making is about having a major effect on one’s own personal well-being. It should not be surprising that the quantity and quality of thinking going into these very different kinds of decisions differ correspondingly. One of the ways in which these decisions differ is in not thinking through political decisions beyond the immediate consequences. When most voters do not think beyond stage one, many elected officials have no incentive to weigh what the consequences will be in later stages — and considerable incentives to avoid getting beyond what their constituents think and understand, for fear that rival politicians can drive a wedge between them and their constituents by catering to public misconceptions.

        “When I was an undergraduate studying economics under Professor Arthur Smithies of Harvard, he asked me in class one day what policy I favored on a particular issue of the times. Since I had strong feelings on that issue, I proceeded to answer him with enthusiasm, explaining what beneficial consequences I expected from the policy I advocated.

        “ ‘And then what will happen?’ he asked.

        “The question caught me off guard. However, as I thought about it, it became clear that the situation I described would lead to other economic consequences, which I then began to consider and to spell out.

        “ ‘And what will happen after that?’ Professor Smithies asked.

        “As I analyzed how the further economic reactions to the policy would unfold, I began to realize that these reactions would lead to consequences much less desirable than those at the first stage, and I began to waver somewhat.

        “ ‘And then what will happen?’ Smithies persisted.

        By now I was beginning to see that the economic reverberations of the policy I advocated were likely to be pretty disastrous — and, in fact, much worse than the initial situation that it was designed to improve.

        Simple as this little exercise may sound, it goes further than most economic discussions about policies on a wide range of issues. Most thinking stops at stage one.”

        – Jeff

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  3. Today I found a great Op-Ed piece by syndicated conservative columnist George Will entitled Seeds of Our Dysfunction. It first appeared in papers nationwide on Oct 20th.

    While I recommend you read the whole piece, it contains a great line that’s related to our discussion here:

    “The Claremont Institute’s William Voegeli, commenting on…the dubious postulate of continuous 5 percent [GDP] growth, says: ‘There’s good reason to fear that if the economy builds a 5 percent levee the polity will just come up with a 6 percent flood.”

    In other words, just like The Existential Christian said, America simply must reduce its rate of spending. It’s impossible to raise government revenue (the “levee”) to match the level of spending (the “flood”) we’re currently at. Our economy cannot prosper under that load of taxation.

    – Jeff

    Like

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