NCPA - National Center for Policy Analysis


February 13, 2006

The Treasury Department wants to create a small new shop to study the impact of tax changes on economic growth and thus also on federal revenues. This is good news, says the Wall Street Journal.

President Bush's Fiscal 2007 budget last week requested about half a million dollars to establish the office of "dynamic analysis" within Treasury's tax division. The not-so-novel idea is to assess the macroeconomic impact of tax policy, with an eventual goal of more accurately measuring the consequences of both tax cuts and tax hikes on federal revenue.

According to the Journal:

  • This would seem to make good policy sense since tax changes are proposed and sold in part for their economic benefits.
  • Yet the bureaucracy, both in Congress and in most of the Treasury, calculates the impact of tax changes largely on a "static" basis, which assumes little impact on taxpayer or investor behavior.
  • So in the crudest example, cutting income tax rates by 20 percent is estimated to cut revenues by roughly 20 percent as well, while a tax increase of that amount gets "scored" as raising a like amount of revenue.

In the real world, this almost never happens, says the Journal. That's because everyone outside the Beltway knows that tax changes have a huge impact on business and individual incentives -- on how and where to invest, how much to work and save, and whether to seek tax shelters to avoid confiscatory tax rates. You'd think politicians would want to take at least some of that into account when contemplating tax changes.

The goal here is accurate score-keeping that takes into account the real impact that taxes have on the economy. The Treasury proposal is much needed and deserves support from Congress, says the Journal.

Source: Editorial, "Dynamic Treasury," Wall Street Journal, February 13, 2006.

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