In the public discussion about the different tax-reduction plans of Governor George W. Bush and Vice President Al Gore, the press corps usually focuses on the dollar size of the plans, because it is the easiest thing to do given time and space constraints. The Gore plan would cost $394.3 billion. The Bush plan would cost $1,437.8 billion over the ten fiscal years 2001 to 2010, more than three and a half times as much. These “cost” numbers, though, are based on the assumption that the tax cuts would have no effects on the economy. They are based on “static” calculations of an economic growth path which the bipartisan Joint Tax Committee assumes will occur with or without changes in the tax code... and the revenues that will flow from that growth path. In either a supply-side model or a fiscal demand-side model, economists assume there would be behavioral changes that would occur as the tax changes occur, although there is much disagreement on what those changes might be.
It gets more complicated, because the two candidates also have spending plans that have effects on the economy that would alter the flow of tax revenues to the government. Any serious analysis would have to incorporate both tax and spending proposals, with the term “fiscal” the umbrella word for the two. You can see how difficult it would be to go through the proposals in each camp and make individual assessments, with different weights, before reaching a conclusions of the aggregate effect. Even though such a study does not involve monetary policy, what happens to the value of money and interest rates on dollar credits has separate important effects on the national economy’s growth path. With so many variables, it becomes easy to see why official forecasts of economic growth, tax revenues and government spending outlays are so often wide of the mark. Yet the government cannot function outside some analytical framework -- just as households and businesses have to budget over a track of time. They must have data points as months and years unfold in order to make adjustments along the way. One of the most important functions of the national government is to produce the overall budget projections and the policies that will optimize the national welfare in meeting them.
This is a non-stop argument, with frictions inside each political party as well as between them. When the two parties appear to be moving in the direction of error, third and fourth parties may emerge to argue the case for distinct parts of the national family. The arguments seem almost as violent in good times, when there is more tax revenue to spend than had been anticipated, as when times are bad and there is a budget deficit. In the current argument between Mr. Bush and Mr. Gore, neither has made a supply-side case for their plans. Both simply assume the official projections of $25 trillion of revenues over the decade and $21 trillion of outlays leaves $4 trillion to be allocated. They are arguing over that $4 trillion in static, not dynamic, terms.
This week, though, the Institute for Policy Innovation has produced such a dynamic assessment, “The Fiscal Plans of Al Gore and George Bush: A Comparison,” by Gary and Aldona Robbins, senior research fellows at IPI and the best, I think, at what they do. IPI describes itself as “a non-profit, non-partisan public policy "think tank" based in Lewisville, Texas and founded in 1987 to research, develop and promote innovative and non-partisan solutions to today's public policy problems. The husband-and-wife Robbins team do not say either plan is good or bad. They are professional technicians who have developed an analytical framework that incorporates both tax and spending sensitivities. They were privately as dismayed as I that Governor Bush did not incorporate a capital-gains tax cut in his model, but they still find that the Bush plan is superior to the Gore plan in its growth effects, and thus its revenue feedback effects. The most interesting finding in their report is that over the decade, the Bush plan would produce enough extra revenue so his plan would pay down national debt as fast as the Gore plan, which is designed to pay down debt with higher taxes. The 16-page Robbins’ report, complete with illuminating charts and graphs, can be located at the top of the IPI home page. http://www/ipi.org. I recommend you download it to hard copy and read it carefully when you find time. Here are the concluding sections from the text:
A Dynamic Analysis of the Gore and Bush Plans
Both the Gore and Bush plans would increase growth relative to the baseline. Gore's positive economic effects would be minimal for three reasons. First, the Gore tax cuts are much smaller, about a fourth of Bush's. Second, three-quarters of his tax cuts have little effect on incentives to work another hour or save and invest another dollar. What is more, the targeted tax cuts phase out at various incomes, leading to higher marginal rates that offset any positive incentive effects. Last, most of his tax increases fall on business to the detriment of the economy.
By 2010.... the Gore plan would increase the growth rate from the 2.7 percent in the baseline to 2.73 percent. The higher growth would raise employment levels by 0.14 percent (about 200,000 full-time jobs) and the stock of U.S. capital by 0.3 percent more than otherwise.
The Bush plan would have bigger, positive effects on the economy largely due to the cut in income tax rates and elimination of the estate tax. By 2010, the resulting drop in marginal tax rates would help raise the growth rate from 2.7 to 2.97 percent, boost employment by 1.4 percent (almost 2 million jobs) and increase the capital stock by 6.8 percent above baseline levels.
Because federal revenues and spending depend on how the economy is doing, the positive economic effects of both plans would alter their budget outlooks. Table 7 compares the static and dynamic budget estimates for the Gore and Bush plans.
In the case of the Bush plan, higher growth would offset 27.3 percent of the static revenue losses between 2001 and 2010. That offset would rise to 34.2 percent between 2011 and 2020. Because Gore's tax increases would be effective immediately while his cuts phase in, growth would be a little lower than that of the baseline for the first several years. As a result, the dynamic revenue loss would be slightly higher than the static during the first ten-year period. By the second period, the positive effects of the tax cuts would raise growth enough to offset 5.7 percent of the static revenue loss.
Put another way, the Bush tax cuts would provide more "bang for the buck." For every dollar of static revenue loss, the Bush tax cuts would generate $1.80 in added output, compared to 41 cents for Gore. The dynamic estimates for outlays are generally lower than the static estimates for both the Gore and Bush plans. The main reason is lower interest charges due to larger surpluses that result from smaller revenue losses when growth is factored in. The growth effects also move up the date the debt gets paid off under Bush from 2014 to 2013.
At stake in this election is the fate of the almost $4.6 trillion in surpluses that the federal government expects to collect over the next ten years. Both candidates agree that the preponderance of the surpluses should go to paying off the debt. The use to which the remainder is put could dramatically affect the federal budget and general economy.
Bush would cut federal taxes a good deal more than Gore. Over the next ten years, federal taxes would average 20.1 percent of GDP under current law. Gore would lower that to 19.5 percent and Bush to 19.1 percent. Still, that leaves Gore with a higher tax rate than the 19.1 percent of the Clinton years. What is more, the tax burden under both Bush and Gore would stay well above the 18.1 percent of the Reagan-Bush years.
The Bush tax cuts would do more for the economy because they are larger and reduce marginal rates. Targeted tax cuts of both candidates, however, would further complicate the tax code and take revenue off the table that could be put to better use with broad-based tax reform.
Gore would increase federal spending a good deal more than Bush. Proposals of both candidates, however, have the potential to accelerate the growth in entitlements, exacerbating long-run financial problems.