As the new Congress faces job one – putting the government’s fiscal house in order – here is a modest proposal: Create a new Team B.
The first Team B convened in the mid-1970s and dealt with intelligence estimates. Many experts felt that CIA reports systematically discounted the actual strength and aggressiveness of the Soviet Union. So with the approval of President Gerald Ford, Director of Central Intelligence George H.W. Bush named a group of outside Soviet and national security experts to review the government’s data and develop their own assessment. The result ultimately played a significant role in the winning of the Cold War.
Today in budget making, the new Congress will face a similar problem of bad and misleading estimates, particularly when it comes to cutting and raising tax rates.
As we all know, the process of projecting the impact of tax rates on revenues has been a field of major budget battle for nearly three decades. The name of the conflict has been dynamic versus static scoring. It was first and is still often fought over the Laffer Curve.
For all its celebrity, the Laffer Curve is a simple price-volume graph. It shows a standard relationship between the level of tax rates (prices) and total tax collections (volume), in which volume rises with prices until prices reach a point of diminishing return and volume falls. Though you wouldn’t know it from the waling and garment rending it has engendered over the years, the concept is so simple and so basic that it may not be too much to say that if it is not valid, nothing in economics can be valid.
In recent years, another, though less widely reviled, focus of the dynamic versus static scoring conflict has been the Hauser Rule. The rule is really no more than a simple reading of tax collection and GDP data since 1950. As revisited (here: http://tiny.cc/u4n0n ) in the Wall Street Journal last Friday by its formulator, financial expert Kurt Hauser, during the last six decades “federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP,” no matter what the tax rates have been.
Why? The answer is identical to Laffer’s. As Hauser said in the Journal, “Higher taxes discourage the ‘animal spirits’ of entrepreneurship. When tax rates are raised, taxpayers are encouraged to shift, hide, and underreport income.”
Whether you use Laffer’s data or Hauser’s, the result is the same. You are embracing the dynamic scoring side in the budget battle and so putting yourself broadly at odds with the Congressional Democratic leadership and with Congress’s official revenue estimator, the Congressional Budget Office.
Democrats oppose dynamic scoring, because it undermines their tax-rate-raising agenda. This is an ideologically driven program that has little to do with evidence, as presidential candidate Obama demonstrated in a 2008 televised debate. He said that even though capital gains tax reductions increased revenue, he opposed cuts on grounds of “fairness.” Given this fierceness of Democratic Party resistance, the Congressional Budget Office has been compelled to go along.
In other words, so far as the CBO is concerned a one-percentage-point cut in a tax rate will always produce a one percent reduction in collections on the tax. And that’s that. Don’t bother me with the facts.
I am not proposing a repeat of the mind numbing rounds of bickering between congressional Republicans and the CBO, such as we have had in the past. Someone other than the congressional GOP should else fight that battle. Let it be Team B, an alternative CBO, a Citizen’s Budget Office.
This new CBO should be formed outside of the government, perhaps under a major free-market think tank or consortium of think tanks. Its job would be to produce revenue estimates for all major tax proposals, posting them side by side with those of its congressional twin. In the short run, this alternative CBO would help even the odds in the tax battles coming. In the long run, matching its forecasts with those of the congressional office would help make the official CBO accountable for its irrationality.
Who would staff the new CBO?
Let me suggest that its leadership should be a Council of Budget Advisors, three experts, much like the White House Council of Economic Advisors. Those three men should be Hauser, Laffer, and economist and former associate director of Ronald Reagan’s Office of Management and the Budget, Lawrence Kudlow. Like Hauser and Laffer, Kudlow combines economic and federal budget depth with prodigious communications skills.
It is, as I said, a modest proposal.