Predicting Policy Results Could Get a Deficit Deal
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The Fiscal Times
October 17, 2011

The way things are shaping up, it may take a stiff dose of creative economics to salvage the Super Committee’s mission

With President Obama and Republican House Speaker John Boehner still miles apart on whether to include tax increases as part of any major deficit reduction plan, the challenge for the 12-member bipartisan committee is to find a way to generate long-term revenue growth without actually raising tax rates. Not so easy.

Since “supply side” economist Arthur Laffer sold Ronald Reagan on the economic-expanding wonders  of tax cuts back in the early 1980s, Republican lawmakers and administrations have pressed the Congressional Budget Office and Joint Tax Committee to use more “dynamic scoring” in estimating the long term impact of tax cuts or tax reforms.

The Super Committee is under orders by Congress to come up with recommendations before Thanksgiving for cutting $1.2 trillion or more of long-term deficits. Obama and the Democrats say the package must be a combination of spending cuts, entitlement reforms and tax increases; Republicans say spending and entitlement cuts are fine but tax increases are “off the table.” They say they will consider revamping the tax code in a revenue neutral way to eliminate wasteful tax loopholes while simultaneously reducing income and business tax rates.

The GOP approach would not raise revenues to help bring down the deficit on paper – unless, of course, Congress and their budget and tax scorekeepers followed new economic models and ground rules to evaluate the impact of the committee members’ plans on the economy and the long-term deficit. They would do that by jettisoning “static” economic models and embracing newer macroeconomic models that do more to anticipate the ripple effects and behavioral changes that likely would be brought on by a significant change in the tax code. In so doing, committee members could claim – with a straight face – that a substantial chunk of their deficit reduction effort could be achieved through an improving economy

“I think it’s doable – I always have,” said Douglas Holtz-Eakin,  former CBO director and White House economist who once helped President George W. Bush’s administration build its case that big tax cuts could at least partly pay for themselves by speeding up economic growth.

“It’s really a comparison of the world with the new policy versus the world without, and you want to capture as many of the impacts [of policy changes] as you can,” he told the Fiscal Times. “That’s simply good science. Some of the impacts are just hard to do. And they’re not special to taxes and they’re not special to spending. They’re just hard to do.”

For the most part, dynamic scoring has encountered heavy resistance and skepticism in Washington over the past 30 years. But with negotiations seemingly at an impasse, some Republican and Democratic members of the Super Committee are giving serious thought to using “dynamic scoring” in an unprecedented way to try to bridge their differences over tax and spending policy.

“It needs to be evidenced
based….You don’t want
politicians trying to rewrite
the rules for scoring.”

“Smart tax reform will result in more economic activity,” said Sen. Rob Portman , R-Ohio, a former White House budget director under George W. Bush and a member of the super committee.  “And additional economic activity will generate more revenue – not by raising taxes but by generating economic growth, which is what both parties want to see.”

Rep. Chris Van Hollen of Maryland, the ranking Democrat on the House Budget Committee and a member of the Super Committee was skeptical. “Whatever approach is taken, if anyone goes down this road, it needs to be evidence based,” he said.

“We should abide by the standards already set by the Congressional Budget Office and the Joint Tax Committee,” Van Hollen told The Fiscal Times Friday. ‘Those should be the basis for scoring, they are the umpires. You don’t want politicians trying to rewrite the rules for scoring.”

But Alice Rivlin,  the founding director of the CBO and an economist at the liberal-leaning Brookings Institution,  said that a shift to more dynamic scoring on the economic impact of major tax reform may be the only way for the Super Committee to reach consensus on a deficit reduction package.

“…You get into endless
wrangles about how much
growth do you expect
from different things.”

“if you mean on the tax side it will give the Republicans an excuse to say we can raise more revenues by lowering the rate and they make sort of optimistic projections, that could be something useful actually to get Republicans on board,” she said in an interview. “The unfortunate thing about dynamic scoring is the Democrats are going to want to do it too, and they’re going to want to say that investing in infrastructure will grow the economy, and then you get into endless wrangles about how much growth do you expect from different things.”

Washington Editor and D.C. Bureau Chief Eric Pianin is a veteran journalist who has covered the federal government, congressional budget and tax issues, and national politics. He spent over 25 years at The Washington Post.