“Dynamic snoring?”
This is a clever term for the reaction of half of America to anything involving math — which, in this case, is the tax policy term, “dynamic scoring.”
What’s dynamic scoring?
Dynamic scoring tries to take into account changes in economic behavior resulting from changes in taxes.
In any attempt to change tax law — cut, raise, or reform — a struggle begins immediately: What will be the revenue result?
Static analysis assumes simple extension of current law. Cut a tax percentage, multiply the new percentage times the base of the tax (income, sales, capital gains…), compare to current revenue to figure out how much money we gave back. Or increased.
Then the riot starts.
The Reagan cuts
The biggest-ever riot resulted from the 1981 Reagan cuts, “supply-siders” led by Arthur Laffer claiming that if we cut taxes the economy would grow faster, so would the tax base, and so a tax cut would result in more revenue! Critics replied: so, if we cut taxes to zero percent, revenue will be infinitely large?
The supply-siders still claim their case, despite constant failure, most recently in Kansas.
Yet they have a valid point, the old and accurate saying, “If you want less of something, tax it.” Cutting taxes will not likely increase revenue, but raising taxes will almost certainly produce less revenue than you think.
New tax cuts
Here is a brief rundown on the new administration’s tax plans and prospects.
Tax cut for individuals. A big middle-class tax cut is going to run headlong into our already poor fiscal position. Our annual federal deficit is $600 billion, and that will explode in the decade ahead as entitlement spending steepens. The Fed thinks the economy is already growing close to limit and a tax cut is unnecessary.
Tax cut for business. U.S. corporate taxes are the highest in the world and clearly self-defeating, one of the few sectors in which a cut would produce more revenue.
However, this kind of tax cut is politically hard to sell. So one scheme would reverse the distortion from too-high rates.
Corporations have stashed perhaps $2 trillion overseas to avoid U.S. taxes. How about a semi-amnesty, in which business repatriates overseas profits and pays a reduced tax rate, a revenue windfall, which would “pay” for a tax cut?
This idea is good, but negotiations will be hard, and the future tax receipts and cuts certainly some distance from plan.
Tax reform. The administration badly wants to lower the top tax brackets.
The last time we did that was Reagan again — 1986 — but that time Reagan and Congress got it right. The 1986 tax reform may be the best tax legislation ever passed, fair and productive.
The scheme was to close loopholes in favor of lower top brackets. In 1986 there were a zillion loopholes and schemes available for closure, which “paid” for the lower brackets.
Unfortunately our revenue-ravenous government has ever since been closing more loopholes and raising brackets back up, and there is no part of the tax code from which to squeeze more revenue to “pay” for “reform.”
The main reason Obamacare can’t be repealed and replaced later: repeal now would kill its revenue now, a huge add to the deficit.
Cross-border tax. Now it gets personal.
Paul Ryan, Speaker of the House, is an all-time policy wonk. He makes Hillary look like a simplifier.
He’s been in the House for 20 years but never had any of his wonkism turned into law. He helped to kill one of the best proposals to come out of the Obama years, the 2010 National Commission on Fiscal Responsibility and Reform (in perhaps his worst mistake, Obama himself was the ultimate killer).
Now Ryan proposes a “cross-border tax” on imports as a hyper-complex offset to other nations’ value-added taxes, proceeds to be used to “pay” for tax cuts.
This new tax is a transparent tariff not supported by experience or any sensible economics. If enacted, it is certain to beget retaliation and guaranteed to produce a fraction of promised revenue.
The tax policy fight ahead will be neither pretty nor productive. The Fiscal Commission is the one open door, combining tax cuts with entitlement reform, principally by “means testing” — reducing benefits for higher-income recipients.
Time to stop. I think I hear snoring!
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
