Friday, August 18, 2006


Does the Congressional Budget Office truly believe that higher tax rates over the next ten years will expand economic growth and lower the budget deficit? This forecast of theirs simply defies economic common sense.

If that were the case, then why not raise tax rates across the board back to 70 percent, where Reagan found them, or even 91 percent, where JFK inherited them?

If it pays less to work and invest, after tax, as implied by the CBO, does anyone really believe people would work harder?

Over then next ten years, the budget agency expects 2.8 percent annual growth, when in fact over the past 50 years, growth has averaged 3.5 percent. What's more, rapid growth over the past 25 years with lower tax rates has greatly boosted this 50-year average.

So the idea that higher tax rates might balance the budget, or that an extension of lower tax rates will generate a $1.7 trillion higher deficit, just makes no sense at all.

Mainstream economists today believe that tax incentives matter. All but the farthest left economists like Paul Krugman and his ilk believe that economic behavior is highly responsive to changing tax rates. The CBO is telling us otherwise and it just doesn’t figure.

Of course, these long term economic and budget projections remind us of Friedrich Hayek’s fatal conceit. That is, government planners can accurately predict the future. I don’t think so. Consequently, with all due respect to the professionals at CBO, I just don’t buy into their new numbers.

Perhaps they should focus more clearly on the here and now. What’s happened in recent years following the Bush tax cuts is a stronger economy, much higher tax revenue collection, and continuous downward estimates of the budget gap.

This is the real story.