The deadly disease of static scoring

Posted: Sep 10, 2002 12:00 AM
President Bush emerged from his Waco economic summit seemingly energized about economic policy. Shortly thereafter, he told reporters that he was planning a new package of tax cuts aimed at aiding the beleaguered investor class. Unfortunately, in the days since, it appears that his plan has fallen victim to apathy, erroneous political calculations and the deadly disease of static scoring. Both those inside the administration and on Capitol Hill basically tell the same story. There is only modest support for any new tax initiatives even among Republicans in Congress. In my opinion, this attitude may significantly change the political dynamics in November. It now appears less likely to me that Republicans will hold the House or take back the Senate. Let's look at the principal arguments I am hearing against tax cuts for the investor class. These include a cut in the capital gains tax rate, increasing the $3,000 limit on deductions of capital losses, raising the limit on IRA and 401(k) contributions, lowering taxes on dividends and mitigating the extra taxes that mutual fund investors pay. -- It will increase the deficit. Recent reports from the Office of Management and Budget and Congressional Budget Office show budget deficits in the near future, as compared to budget surpluses projected last year. At such a time, it is said, the government simply cannot afford to lose any more revenue. Therefore, no additional tax cuts. There are many problems with this argument. The first is that deficits simply do not matter very much economically. For a long time, people believed that they cause inflation and raise interest rates This seemed plausible in the 1970s, when all increased simultaneously. However, in the 1980s, we saw rising deficits and falling inflation and interest rates. In the 1990s, deficits changed to surpluses with no change in the basic inflation or interest rate. In just the past year, we have seen the budget swing from a surplus of $127 billion to an estimated deficit of $157 billion, a change of almost $300 billion. Yet during this period, both inflation and interest rates have fallen. The Consumer Price Index rose 3.4 percent in 2000 and 1.6 percent last year, and will likely come in lower this year. The prime interest rate is down by 2 percentage points in the last two years, and home mortgage rates are at the lowest levels most people have seen in their lives. So if deficits don't affect either inflation or interest rates, why should anyone care about them? In fact, no one outside the Beltway does. The issue didn't even register in an Aug. 21 Harris poll. -- Cutting taxes for investors will only benefit the rich. In truth, the primary beneficiaries will be the middle class, struggling to save for their childrens' education and for retirement. Rich people don't care about loss limits because they always have gains against which to net their losses. It is only those in the Middle Class who really would benefit from deducting losses against ordinary income. Similarly, raising 401(k) limits and allowing some dividends to be received tax-free may incidentally aid some rich people, but the overwhelming beneficiaries will be those in the middle class. -- Reducing taxes on saving will raise saving, which will depress growth. I only mention this stupid argument because I have actually heard people on Capitol Hill mention it. The theory is that only spending increases growth and is based on the idea that saving is like sticking money in a mattress. But of course, saving finances investment, which increases productivity, thereby increasing jobs and wages. Interestingly, the people who think deficits are evil are the same ones who think saving is bad for growth. But in theory deficits are just negative saving. Theoretically, therefore, these people should favor deficits now in order stimulate spending. They don't. Apparently, saving is only bad when individuals do it, and deficits are bad only when they result from tax cuts. -- There isn't enough time for Congress to act before it must adjourn for the election. This may be true, but is a poor reason not to take action, at least for Republicans. It would give them something to run on, a reason for voters to think that the House should be kept under Republican control and give them a majority in the Senate as well. At present, I see little reason for marginal voters to vote Republican. War and terrorism are important, but historically pocketbook issues predominate on Election Day. When the economy is as weak as it is now, voters usually vote against the party in power unless they have a good reason not to. Without Republicans having a tax initiative to run on, I think swing voters will follow the historical pattern and give both houses of Congress to the Democrats in November.