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Laffer Curve Wanted: A CBO Overhaul December 4, 2014 8:00 AM | Tagged as CBO, Joint Tax, Laffer

WSJ December 2, 2014, Page A17: “Congress’s Budget Office Needs Better Numbers” by Avik Roy

WSJ December 2, 2014, Page A16:  “How to Score in Congress” (editorial)

The Congressional Budget Office (CBO) and its partner the Joint Committee on Taxation score the economic impact of spending and tax bills. Established by Democrats in 1974, CBO was established to counteract Republican ideas and promote an ever growing government.  CBO is not the independent scorekeeper that the media portrays, although in recent times have been prescient in their forecasts of many leftist ideas.

Their motto: tax changes don’t change behavior. This is why any tax cuts show little effect on the economy in their estimates, but when such cuts are implemented, growth happens immediately, and tax revenues actually increase. This is the Laffer Curve, discussed in this blog on several occasions.

From its beginning, CBO has used Keynesian tools to value the impact of big government ideas. Such tools, models, and equations generally understate the economic effect of spending and overstate the effect on revenues. To do this, these models avoid economic reality that costs and taxes drive behavior.

In graduate B-School at USC, Dr. Shapiro reminded us of the Republican Senator who – as a gag – requested the CBO to use their models to calculate the revenue from increasing the marginal tax rate to 100%.  Yes, CBO came back with a gargantuan number as the projected revenues from such a move. Of course, economic common sense says if you are going to give 100% of what you make to government, the prudent behavior would be to stop working. Tax revenues would be zero at a 100% tax rate, some huge number. This illustrates the inability of CBO to provide accurate estimates of the impact of Congress’s mischief.

Avik Roy’s piece proposed three changes for CBO: Start reflecting the fact that policy affects behavior, admit that private competition reduces public cost, and begin publishing their analyses for others to provide review and comment.

With a Republican Congress and Senate, it’s time to change the leadership at CBO and Joint Tax, revise laws that force the Keynesian approach, and update their models to reflect modern thinking.

[Although opinion is included, The Biz Bucks Blog is primarily written to former students of Biz Bucks training courses to encourage their daily reading of the three opinion pages of the WSJ. This refreshes principles of Biz Bucks courses and improves business acumen on topics not discussed in Biz Bucks training.]

 


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