Tax re­form for the real world

Gov­ern­ment rev­enue fore­casts fail to ac­count for hu­man be­hav­ior

The Washington Times Daily - - COMMENTARY - By Richard W. Rahn

There is an old adage that en­trepreneurs of­ten find to be true, and that is that things take three times as long and cost three times as you much as you thought. The Repub­li­cans claim they are go­ing to get tax re­form done this year — but this is not go­ing to hap­pen un­less they do two nec­es­sary things. First is to ex­tend their num­ber of work days, and the sec­ond is to ig­nore the Con­gres­sional Bud­get Of­fice (CBO) rev­enue fore­casts from the pro­posed tax changes.

The only way to get tax re­form passed by the fall is to make sure that the pain of not get­ting it done by a date cer­tain is so great that they will make the nec­es­sary com­pro­mises with each other to get it passed. Congress has sched­uled a July 4 hol­i­day and an Au­gust re­cess. Mem­bers’ spouses have al­ready made plans for Au­gust — trips to far­away places or to see rel­a­tives — and promised fun events for the kids. Many commentators and oth­ers have said that it would be ir­re­spon­si­ble to take the Au­gust va­ca­tion if the promised work is not done. And yes, that puts a cer­tain pres­sure on Congress, but noth­ing like the pres­sure that spouses and kids put on them to go on va­ca­tion. Speaker Paul Ryan and Se­nate Ma­jor­ity Leader Mitch McCon­nell are smart enough to know that with­out a tax cut this year, their con­trol of Congress af­ter next year’s elec­tion is only go­ing to be a mem­ory. Real lead­ers un­der­stand that mak­ing the troops un­happy in

Don’t feel sorry for mem­bers of Congress — they were the ones who made the prom­ises to get rid of Oba­macare and to pass tax re­form by La­bor Day.

the short run is at times nec­es­sary to achieve vic­tory in the long run. So they need to an­nounce that no more va­ca­tions (or “dis­trict work pe­ri­ods”) un­til tax re­form is fin­ished. That is, the time to get the work done comes first, and the time left over can be used for va­ca­tion.

This may sound rad­i­cal — but most kids know there is no TV un­til the home­work is done. First re­spon­ders, like po­lice­men and fire­men, do what they need to do be­fore go­ing home. Busi­nesses with dead­lines don’t stop at 5 o’clock. The long es­tab­lished prin­ci­ple of overtime pay, or time off, is merely a way of com­pen­sat­ing peo­ple for do­ing what has to be done at a given time. We don’t give Congress mem­bers overtime pay, but we can fire them (by vot­ing for their op­po­nents) if they don’t ful­fill their prom­ises in a timely mat­ter. Don’t feel sorry for them — they were the ones who made the prom­ises to get rid of Oba­macare and to pass tax re­form by La­bor Day.

The tax cuts need to be put in place in suf­fi­cient time to have a pos­i­tive ef­fect on the econ­omy, well be­fore Elec­tion Day 2018 — or it will be po­lit­i­cal sui­cide. Some will be tempted to not pass tax re­form un­til next year and then make the tax cuts retroac­tive. This will have no be­hav­ioral ef­fect and will only waste money with­out hav­ing a pos­i­tive ef­fect on the econ­omy or an in­cum­bent’s po­lit­i­cal prospects.

When de­cid­ing on how big a tax cut “we can af­ford,” Congress re­lies on the CBO to pro­vide the num­bers. As­sume you were run­ning a busi­ness, and your sales fore­cast de­part­ment al­ways over­es­ti­mated the in­crease in rev­enues ev­ery time you in­creased prices and over­es­ti­mated the rev­enue losses each time you cut prices. In fact, you found that be­cause peo­ple had choices, some­times a price in­crease re­sulted in less rev­enue and some­times a price cut re­sulted in more rev­enue — we call this the real world.

Wash­ing­ton is not the real world, and both elected of­fi­cials and gov­ern­ment bu­reau­crats like to pre­tend that prices do not af­fect be­hav­ior and ig­nore the fact that a tax is a price. Thus, the gov­ern­ment tax rev­enue fore­casts al­most al­ways over­state the ad­di­tional money from a tax rate in­crease and over­state the tax loss from a tax rate cut.

It is al­most im­pos­si­ble for “tax re­form” to take place un­less there are more win­ners than losers, which means that “re­form” has to be ac­com­pa­nied by a real tax cut to ob­tain the nec­es­sary num­ber of win­ners. But if the rev­enue fore­cast­ers over­state the amount of loss from a tax rate cut, and Congress wants to claim that the bill is rev­enue neu­tral as to not in­crease the deficit over the long run, they have put them­selves into a very tight po­lit­i­cal box.

The proper way to ap­proach the prob­lem is to ask non­govern­ment tax rev­enue fore­cast­ers who have true dy­namic be­hav­ioral tax rev­enue mod­els to give Congress an es­ti­mate as to both the shape and size of a tax cut that would in­crease GDP and job growth by a cer­tain per­cent per year. And then, re­quire that spend­ing growth be cut to meet the tax rev­enue ex­pec­ta­tions — un­like do­ing it in the usual, backward man­ner of as­sum­ing tax rev­enues will rise to meet spend­ing wishes.


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