Lefties Attack Paul Ryan for Bringing Reality to Budgeting

Responding to comments by Rep. Paul Ryan of the need for reality-based scoring of fiscal policy, the liberal blogosphere has launched a full-scale campaign to discredit Ryan for attempting to force the Congressional Budget Office (CBO) to use "special GOP math" to justify tax cuts. The campaign was capped by New York Times columnist Paul Krugman, who apocalyptically wrote that should Ryan succeed in pushing dynamic scoring, it "would destroy the credibility of a very important institution, one that has served the country well."

As so often happen with these orchestrated "viral" campaigns where everyone is working off the same talking points, the rhetoric tends to outrun the facts. The first fact these pundits get wrong is which Congressional agency performs what function: The CBO's job is to model and score spending bills; it is the job of the Joint Committee on Taxation (JCT) to model and score tax bills. But the biggest oversight that Krugman et.al. make is ignoring the fact that the institutions they want to protect from Republican math have actually been performing dynamic scoring over the past few years - and some of these liberal bloggers likely cheered the results.

Notably, many liberal bloggers probably applauded when the CBO determined that the Senate immigration bill (S. 744) would be a net benefit to both the federal budget and the U.S. economy. CBO estimated the bill's provisions would increase the number of workers in the U.S. by 10 million by 2023, which would not only boost tax revenues but it would place additional demand on government programs. However, the net affect, CBO determined, would be lower federal deficits because the new tax revenues would outpace the additional outlays.

For the broader economy, CBO determined that the increased labor force from higher immigration would produce an interesting sort of supply-side effect in boosting GDP. As CBO Director Doug Elmendorf described the effect in a blog last March:

"That [GDP] boost would be partly the direct result of more workers. In addition, the increase in the number of workers would make the existing stock of capital relatively scarce (compared with the number of workers) and thus encourage businesses to undertake more capital investment, which would raise GDP as well."

Speaking of the economic consequences of capital investment, most liberal bloggers probably ignored the JCT's dynamic analysis of the tax reform draft developed by Ways and Means Chairman Dave Camp. While the JCT could have been more transparent with its methodology, the exercise illustrated the limitations of revenue neutral tax reform and reminded us why dynamic scoring is key to achieving tax reform that boosts growth and workers' wages.

Critics of dynamic scoring worry that it will be misused to justify tax cuts that are not "paid for" and, thus, "bust the budget." But one of the real values of dynamic scoring, as the JCT study shows, is that it allows us to understand the impact of the tradeoffs that have to be made if lawmakers strictly adhere to the notion of revenue neutrality. In order to avoid "busting the budget," Camp decided that his plan would be revenue neutral as scored on a conventional, or static, basis. This required him to offset the statically estimated loss of revenues from cutting corporate and individual tax rates by eliminating various tax preferences and imposing new taxes on targeted industries (such as a new bank tax).

As a result of these choices, the JCT's models predicted that the Camp plan would produce very little additional growth over ten years-between 0.1 percent and 1.6 percent depending on the assumptions made. At best, this would add about four days' worth of wages to a typical family's income.

JCT did determine that the individual rate cuts would induce many new workers to enter the workforce, which would boost GDP. However, the overall growth potential of the plan was tempered because the various business offsets were "expected to increase the cost of capital for domestic firms, thus reducing the incentive for investment in domestic capital stock."

However, not all industries would be affected equally by these increased capital costs. As John Buckley, Former Chief Tax Counsel for Rep. Charlie Rangel, and Former Chief of Staff of the JCT, wrote in his July 2014 testimony before Congress: "Businesses, like many manufacturers, that are capital intensive or have large research costs would see the largest increase in the cost of capital." Buckley warned lawmakers that these increased costs would further motivate manufacturers to move jobs and factories offshore.

Indeed, the Tax Foundation's dynamic analysis of the Camp draft found that workers would be the ultimate losers as a result of the increased cost of capital. Our model showed that people would be working longer but producing less total output with less capital. In turn, this would lead to more people working at lower wages.

The goal of tax reform should be to boost economic growth, but in ways that increase wages and living standards for American workers. Conventional scoring techniques not only can't give lawmakers that kind of information, these methods actually lead them to make decisions that run contrary to the interests of workers.

Those who seek to denigrate dynamic scoring are effectively impugning the one tool that can give lawmakers the information they need to make policies that make all Americans better off.

Congress should have the benefit of realistic dynamic scoring for both tax and spending policies-as CBO and JCT are cautiously attempting to do.

Everyone knows that the conventional "static" models used currently to advise members of Congress are wrong. Moving to more reality based modeling techniques will not undermine the credibility of CBO or JCT, but rigidly adhering to obsolete methods surely will.