On March 25, the Congressional Budget Office released an important study of President Bush's budget proposal. What was novel about this study is that the CBO attempted to calculate the impact of the proposal on the economy as a whole. Normally, it assumes that even large changes in taxing and spending will have no effect whatever on such things as the unemployment rate, real growth in the economy, inflation and interest rates, among other things.
This method of analysis has long frustrated advocates of supply-side tax cuts. They believe that holding the economy constant when calculating the effects of such tax changes exaggerates their budgetary cost, thereby decreasing their chances of being enacted by Congress. After all, the whole point of a supply-side tax cut is to increase economic growth by stimulating work, saving and investment.
Some people believe that the inclusion of macroeconomic effects in revenue estimates is some kind of trick to make tax cuts appear costless. It is often alleged that Ronald Reagan played such a trick on the American people in 1981 by saying that the big tax cut that year would not reduce federal revenue. This is nonsense. The Reagan administration always said that the 1981 tax cut would lose large revenues, and its estimates were comparable to those made by independent analysts.
Furthermore, supply-side economists who made private estimates of the revenue impact of the Reagan tax cut-estimates that did incorporate growth effects-also showed large revenue losses. For example, an estimate by economist Norman Ture of an early version of the Reagan plan showed large net revenue losses even 10 years after enactment. Economist Michael Evans came to similar conclusions.
What supply-siders always said is that the Reagan tax cut would not lose as much revenue as conventional (static) estimates predict. Economist Lawrence Lindsey, then at Harvard, concluded that when all was said and done, the net revenue loss from the 1981 tax cut was about a third less than official estimates predicted. A CBO study found that it was about 25 percent less.
Supply-siders believe that a dynamic analysis of President Bush's tax plan would show approximately the same thing -- that the net revenue loss will be between 25 percent and 33 percent less than a static estimate would show.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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