Congressional leaders are using a discredited economic theory to help push through a costly package of tax cuts that mostly benefit large corporations.
Last week, the Joint Committee on Taxation (JCT) scored the Senate’s version of controversial tax extenders legislation using dynamic scoring, a method that purports to quantify the macroeconomic effects of tax changes based on widely discredited supply-side economic theories.
The tax extenders bill is the first to be subject to a House rule passed earlier this year requiring the JCT to project the cost of substantial tax legislation using both the conventional (static) method of scoring as well as dynamic scoring.
The tax extenders are a package of various temporary tax breaks that Congress has to vote to renew every two years or so. The bulk of the cost of the package are attributable to a few tax breaks for corporations, such as “bonus depreciation,” the research tax credit and the “active finance” exception. As we have pointed out before, tax extenders are mostly bad policy and an example of congressional hypocrisy, as the costly business tax breaks are deficit-financed while Congress insists that the costs of legislation benefitting low- and middle-income families be offset by spending cuts.
Using dynamic scoring allows lawmakers to grossly underestimate the true cost of the tax breaks. The JCT estimates that the corporate tax cuts in the extenders bill would lead to slightly higher economic growth in the short term, thereby reducing the projected cost of the bill by about 11 percent.
Of course such sleights of hand are nothing new. For more than a decade, Congress has vastly understated the cost of the extenders by enacting them for only short periods, even though everyone expects them to be reenacted continually. According to the Congressional Budget Office, making these tax breaks permanent would cost more than $700 billion over 10 years.
This year, Congress has added dynamic scoring to its skullduggery. The scoring method employs a primitive economic model that is based on the assumption that tax cuts for corporations and the wealthy almost always will be good for the economy. In contrast, the model assumes programs and tax changes that help ordinary taxpayers will be economically harmful.
Historically, these supply-side assumptions have not passed muster. The theory got a full-blown test under President Ronald Reagan in 1981, and it failed miserably, as Reagan himself soon acknowledged. Even the Treasury Department under President George W. Bush essentially refuted the idea that tax cuts necessarily lead to economic growth.
Even with the assumption of short-term economic growth, JCT notes that the extenders bill will result in decreased economic growth in the long run, and thus reduce revenues, due to the larger federal debt and associated increases in private borrowing costs. While this long-run effect is anticipated to be “small,” JCT did not specify what it means by small, so the slowdown could very well reverse the alleged tiny growth increase projected within the 10-year budget window.
Congress, however, will probably ignore this caveat, and, conveniently, focus solely on the short-term economic boost that is mistakenly assumed to result from tax cuts for corporations and the wealthy, while neglecting the long-term economic harm.
The flaws of dynamic scoring come on top of the long-time problem with the conventional cost estimate, which vastly understates the true 10-year cost of the tax extenders. The Senate extenders bill would extend the expired tax provisions retroactively to the beginning of this year and through the end of 2016. The two-year cost of these measures would be $170 billion. But the Joint Committee staff’s analysis makes the ahistorical assumption that the provisions will actually expire after 2016. Because the biggest item in the bill, “bonus depreciation,” trades lower revenues in early years for higher revenues later when that provision will allegedly expire, the 10-year cost estimate for the bill ends up being lower than the two-year cost, at only $97 billion. Dynamic scoring then brings the official cost estimate down to $87 billion.
Corporate lobbyists and their congressional allies may be pleased with JCT’s questionable dynamic scoring estimate that makes the extenders bill appear slightly less costly. But they may be disappointed at how small the alleged positive economic effects are. The rest of us should be very worried, however, that the JCT staff seems to have bought into a diluted version of the long discredited supply-side economics theory.