The Biz Bucks Blog provides former Biz Bucks students and other busy professionals with a summary and commentary of seminal articles from the opinion pages of the Wall Street Journal. You can be notified of a new posting by subscribing to the blog (enter email in box on right) or by following on Twitter: @BizBucksGuy.
Hayek Scores Over Keynes April 8, 2013 5:00 PM | Tagged as dynamic, scoring, static
WSJ April 1, 2013 (page A12): “The Senate Gets Dynamic” (editorial)
No, the above title is not a news flash from March Madness.
For decades, Congress has used Keynesian models for scoring proposed tax policy changes. This is also called “static” scoring, which is based on the false assumption that increasing tax rates will always increase tax revenues. (Search for past Biz Bucks Blogs on macroeconomics, Laffer, and Keynesian for more information.) These static models assume that with ever increasing tax rates, there is no effect on economic output. The businesses, entrepreneurs, and venture capitalists of our country will just keep investing and making more jobs, more products, and more money, and paying more taxes, regardless of tax policy. That is ridiculous.
The Net Present Value of a business decision is fundamentally based on future, AFTER TAX cash flows. When taxes are raised, proposed ventures have a smaller NPV and, thus, many become unwise risks. Economic activity is reduced by increasing taxes from the levels we now have. This, in turn, reduces tax revenues. This is a classical economic principle. The economist Frederick Hayek who wrote about this would be proud to know that finally some members of Congress are starting to “get it”.
As noted in the referenced editorial, a recent vote in the Senate has brought hope to the current legislative insanity. Recently, they voted 51-48 in a non-binding resolution to require CBO to include dynamic scoring in all proposed tax changes. This, unfortunately, means the current models would not be retired and replaced, but at least a second opinion would be available that reflects the reality that tax rates affect economic decision making.
While no model will accurately predict the effect of tax policy changes on the economy, dynamic scoring comes much closer that static scoring. As my USC Econ prof, Dr. Alan Shapiro, taught us, “It is better to be vaguely right, the precisely wrong.”
No, this editorial wasn’t an April Fool’s joke. Hope now springs eternal that a “binding” resolution for dynamic scoring will pass and change the culture, the capability, and the competence of our national legislative branch.
Posted in MacroEconomics | 0 Replies
To receive email updates when a new post is made, please enter your email address in the box below and click Subscribe.
Use these key words to search past blogs:
1994 97% Alesina Recession Alinsky Allesina austerity Baloney BAT Binz bird kills Bogle Border Adjustment Tax Brulle Bryce capitalism carbon Carbon Dioxide CBO CFTC chains China Churchill Climate Climate Change Clinton Comparative Advantage Crichton Cronyism Cummins Curry Darwin Death panel demographics population economics Denier derivatives Dodd-Frank Drug dynamic Dynamic Scoring education electric car Energy Energy Policy Enron Debt Entitlements Eugenics Fat Fry Flat Earthers fracking free markets free trade Free Trade E-Verify Free Trade Zoellick Freedom Heritage Foundation Friedman gas lines Gas Prices glaciers Global Warming Global Warming Sustainability global warming subsidies IMF Globalization Trade God Google Gore Green Blob Grifo Groupthink Growth Hannity Hayek Hostess Hybrid Immigration Imports index funds Indexing Intellectual Denial investing investment IPCC JFK Joint Tax Kennedy Kerry Keynes Keynesian Keynesian Tax Cuts King Barak Bird Kills Koch Koonin Laffer Lamar Smith Lomborg macroeconomics macroeconomics;static; dynamic MACT Makiel markets Marxist medical care minimum wage Mitchell Model T Moore Morgenthau Navarro Neumark NOAA NY Times Obamacare ObamaCare Rove Health Insurance O'Reilly participation rate Patrick Moore peer review Peer Review EPA Piketty Pipelines plywood Presidential authority Price Controls Pruitt Racial divide Rare Earth Reagan Recession REE Renewable Portfolio Standards Renewables Ricardo Ridley robotics RPS Ryan Schlaff Science science integrity scoring Settled Science Shaffer shortages socialism socialized medicine Solar Panels Solvaldi Sovaldi static steel STEM Stephens Steyer stimulus subsidy sugar Supreme Creator tax policy Taylor territorial taxes corporate taxes Tesla Trade train wreck Trump unemployment wages Wind wind power women Zuckerman