Plan B Forum

Why Marco Rubio is insisting that his massive tax cuts will pay for themselves, explained

Updated by Ezra Klein on October 6, 2015, 1:50 p.m. ET @ezraklein
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On Tuesday, Marco Rubio told CNBC's John Harwood that his massive tax cuts — which estimates have found would blow a roughly $4 trillion to $5 trillion hole in the deficit — creates a surplus "within the 10-year window."

It is worth slowing down to make clear exactly what Rubio said there. Rubio's plan cuts corporate taxes, capital gains taxes, taxes on the rich, taxes on the middle class — it cuts taxes on everyone. The cuts are so large that the New York Times called it "the puppies and rainbows plan." And what Rubio is saying is that his massive tax cut is actually going to mean more tax revenue for the government — that two minus one will equal four.

Harwood seemed shocked. "Wait," he interrupted, "your plan creates a surplus because of the dynamic effect?"

"Absolutely," Rubio replied.

Rubio's assurance will, to most tax analysts, sound like nonsense. And it is nonsense. A plan that massively cuts taxes isn't going to lead to budget surpluses. But it's nonsense that has been validated by an important conservative tax group, that shows the kind of candidate Rubio is looking to be, and that speaks to why the debate over taxes in Washington has become so dysfunctional.

But let's start with a term Harwood used that may be unfamiliar: "the dynamic effect."
What is "the dynamic effect," and how does it turn a massive tax cut into a revenue raiser?

There are two ways to calculate the cost of a given policy. One is to do a static estimate that simply looks at the policy in isolation. So if I cut your taxes by $10,000, a static estimate will say the tax cut costs $10,000.

By contrast, a dynamic estimate tries to account for the way people respond to policy changes. So if I cut your taxes by $10,000, you might invest that $10,000 in a company that invents cold fusion, doubles the rate of economic growth, and creates a huge surge in future revenues.

The problem with static estimates is that they're wrong. The problem with dynamic estimates is that they're impossible.

If you want to dynamically estimate the revenue effects of a tax cut, you need to know the future. Harvard's Greg Mankiw, who served as chief economist to President George W. Bush, runs through just some of the considerations:

In the coming years, will these Congresses respond quickly to the revenue shortfall, or will they let budget deficits fester? When they act to close the budget gap, will they increase taxes, or will they cut spending? If they cut spending, will it be on consumption items, such as health care for the elderly, or on growth-promoting investments, such as education for the young?

But the impossibility of dynamic scoring is actually helpful for advocates: Because it's impossible to get right, no one can really prove that you got it wrong. And that helps conservatives avoid a central problem in their policy agenda.
Conservatives hate taxes, they dislike deficits, and they're scared of spending cuts. Dynamic scoring is the answer.

Conservative policymaking is caught in a trilemma: Conservatives want to lower taxes, they want to balance the budget, and big spending cuts are unpopular. But there's no way to balance the budget while cutting taxes and only cutting popular spending.

Among responsible policymakers, that trilemma leads to hard trade-offs. Among irresponsible policymakers, it leads to the magic of dynamic scoring.

The basic idea here is that massive tax cuts boost growth so much that they pay for themselves, and so there's no actual trade-off between lower taxes and balanced budgets. In this telling, eating your cake leads your body to burn calories so fast that it's like you end up thinner than you started!

Basically no serious economists believe this. Careful efforts to quantify whether tax cuts boost growth have led to estimates that they have a modest negative effect, a modest positive effect, or not much effect at all, depending on what assumptions you use. Mankiw, the former Bush adviser, described the idea that cuts boost growth so much that they pay for themselves as the province of "cranks and charlatans" in his economic textbook.

At various times Republicans have tried to stock the government with cranks and charlatans who will tell them what they want to hear, but it's never really worked out. In 2003, for instance, they installed Douglas Holtz-Eakin as the new director of the Congressional Budget Office and asked him to dynamically score the Bush tax cuts. The Wall Street Journal records the disappointing results:

Some provisions of the president's plan would speed up the economy; others would slow it down. Using some models, the plan would reduce the budget deficit from what it otherwise would have been; using others, it would widen the deficit.

But in every case, the effects are relatively small. And in no case does Mr. Bush's tax cut come close to paying for itself over the next 10 years.

Of the nine models Holtz-Eakin tried, only two showed much improvement in the deficit — and both of those models assumed taxes would be raised after 2013 to eliminate the deficit, so "people will work harder between 2004 and 2013 because they know that their taxes will be going up, and will want to earn more money before those tax increases take effect."

But Washington has plenty of not-very-serious economists who work outside the government who are happy to provide air cover to tax-cutting Republicans. And Rubio went out and found himself some.