POAC VII, part b

Okay, so maybe part b didn't exactly follow "soon."

I was busy.

In the previous post, I was dissecting the so-called "host of studies" referred to by POAC that supposedly refute a GOP talking point that tax cuts pay for themselves. I'll quote the citation again, picking up on the transition between the Harvard (N. G. Mankiw) study and the next member of the "host."

"The feedback is surprisingly large," concluded N. Gregory Mankiw, the study's co-author. He headed Bush's Council of Economic Advisers from 2003 to 2005.

Mankiw's study also concluded that the Treasury payback would be 17 percent of the tax-cut's cost if the reduction were on wages instead of capital.

That's in line with a December study by the CBO. It looked at a hypothetical 10 percent cut in income-tax rates. It concluded that up to 22 percent of the lost revenue could be regained over five years, and up to 32 percent over five more years.
("Tax cuts lose more money than they generate, studies conclude" by Kevin G. Hall)

Here's the study (be forewarned, it's in .pdf format).
The reporting on the CBO study was good (to my admitted surprise). The author didn't exactly play up the fact that cuts in capital gains taxes were more likely to return to the government in the form of revenue, though.
Perhaps he wouldn't want people remembering that when a later story proclaims that tax cuts primarily helped the wealthy.

These two apparently comprise the "host" of studies. Both suggest (they are only estimates, after all), that tax cuts do result in sufficient economic growth to at least partially pay for themselves--and that's buying into the biased way that the mainstream media talks about taxes.

The tax cuts were recommended initially as a response to a budget surplus, then secondarily as a Keynesian approach to an impending recession. Given that the budget deficit is shrinking under current policy, any increase in taxes--including the sunset of the Bush tax cuts--should be justified to the taxpayers in no uncertain terms.
But that won't happen. The Democrats will propose plenty of new programs that will justify any increase in taxes. Wait and see.

***
One additional note.
The CBO report has footnote that seems lost on Democrats and many Republicans as well. It talked about the pressure for wage increases when the labor pool shrinks and warned of inflationary pressure as a result.
Yet Democrats push for minimum wage increases fairly routinely--typically without making a peep about inflationary pressure.

It's all about politics. Raising the minimum wage when the market has already raised the entry-level wage doesn't do much harm (unless the market changes so that there is pressure for wages to fall--then it does plenty of harm) because it doesn't actually do much. But the politicians who voted for it can claim to be for the little guy.

POAC VII a.: Tax cuts and revenue

I'm delighted to see the subject of tax cuts and revenue broached at the rather poor Project for the Old American Century "counter-spin" page.

The talking point
Tax cuts generate revenue and pay for themselves

The facts
A host of studies, some of them written by economists who served in the Bush administration, have concluded that tax reductions mean less money for the Treasury. They may help spur economic growth, but they still lose more revenue than they generate.
(POAC)

The link in this case refers to a different page at the POAC Web site, which contains another link to the original (or what was once the original: "The requested article was not found."). That link ended at the "McClatchy Washington Bureau," formerly run by Knight-Ridder.

The article, despite a glowing review of the Washington Bureau by the American Journalism Review, simply isn't very good, as I shall show.

Here's the headline:

Tax cuts lose more money than they generate, studies conclude

Even though this headline is ultimately misleading, it's actually better than what Republican ideas get in the mainstream press. The headline implicitly admits that tax cuts generate revenue. Where was this type of incisive reporting on the approach to the 2004 election?

Mr Bush's tax cuts have been staggering in their scope and audacity. A report this month showed that Bush's $270bn tax cut last year, which the Republicans said would boost growth and jobs, had overwhelmingly gone to the rich, as sceptics such as Harvard economist Paul Krugman have long argued.
(Salon, August 23, 2004)

Not a peep that some of that $270 billion is coming back in the form of revenue? Wonder why?

But let's move on to the content of the article instead of belaboring other past failures of the mainstream press.

At a ceremony on the White House lawn, Bush said his tax cuts had helped the economy grow, "which means more tax revenue for the federal Treasury."

That's just not true. A host of studies, some of them written by economists who served in the Bush administration, have concluded that tax reductions mean less money for the Treasury.
(POAC)

Kevin G. Hall wrote the story. Note the disconnect between what Bush said and the message that Hall carries from it. Bush makes two claims.

First, that the tax cuts helped the economy grow. That point isn't argued seriously, in my experience. The tax cuts did help the economy.

Second, Bush claims that a growing economy increases tax revenues. That is also true.

For Hall, this means that Bush is saying that cutting taxes results in increased net revenues, since that is the proposition, by implication and context, that he describes as "just not true."

But Hall's problems don't stop with his creative interpretation of the president's words. What is this "host of studies"?

The first "study" mentioned is a proposed model for evaluating the net effect of tax cuts.

The paper, written by N. Gregory Mankiw and Matthew Weinzeirl of Harvard, was titled "Dynamic Scoring: A Back-of-the-Envelope Guide." Now you know why Hall did not name the study.

Hall reports on the paper incompletely, with significant omissions.

The authors make plain that key factors were not taken into account in the study, such as the "short-run Keynesian effects," (page 20, second paragraph) which refers to the economic effects of government policies. In other words, the paper discounted the effects of (short-run Keynesian) economic growth in making its estimations, which is the point at issue in the words uttered by Bush.

Hall also uses a quotation regarding the 17 percent return on a labor tax cut, whereas the context (page 10) reveals that the return may fluctuate considerably owing to a variety of factors.

This seems to indicate that Hall gave the Mankiw-Weinzeirl paper a cursory examination.

More from the "host of studies" in part b, coming soon.