It’s been a good couple of weeks for those of us who have been arguing for 30 years that changes in tax policy alter the way consumers and businesses make decisions.
Brief background: Congress has a long history of acting as it the economy is static—i.e., that consumers and businesses don’t change their behavior when Congress changes policies such as raising taxes.
But of course, that’s not true. Consumers and businesses generally make rational decisions in response to changes in tax policy because people respond to incentives. This reality is the source of the political aphorism “if you tax something you get less of it, and if you subsidize something you get more of it.”
The thing is, when supply-siders have made this obvious point and argued that cutting taxes on savings will result in more savings, cutting taxes on investment will result in more investment, or cutting taxes on work will result in more work, progressives have ridiculed the idea. They’ve argued that it’s “voodoo economics” to assert that cutting taxes can actually lead to an increase in tax revenue.
The alternative to the static approach is a dynamic approach, and thus with dynamic scoring government economic forecasters at least attempt to account for possible changes in human behavior that might result from changes in policy.
Democrats have largely resisted dynamic scoring because they saw it as a Republican scheme to justify cutting taxes. But now, Democrats have had a sudden religious conversion and are insisting that dynamic scoring be used to evaluate their huge new spending plans.
What they once described as “cooking the books” is now part of their strategy. Why? Because there is no way to pay for their huge additional spending without being able to argue that public spending on infrastructure will result in economic gains and thus added revenue.
Maybe it will, and maybe it won’t. I’m skeptical. But at least Democrats are finally acknowledging the need to incorporate dynamic scoring in spending and revenue estimates!
Because it is patently obvious that people change their behavior in reaction to changes in law and policy.
After all, that’s the whole basis for so-called “sin taxes” like excise taxes on cigarettes, alcohol, etc. The assumption is that if you put a high tax on something deemed undesirable, people will reduce their consumption.
But for too long the progressive Left has embraced dynamic effects when it served their agenda and rejected them when it didn’t. Now that the Left has openly admitted that dynamic scoring is the appropriate way to assess a proposed policy’s economic impact, maybe we’ll be able to hold their feet to the fire when a future administration proposes tax cuts.