The federal budget includes a provision to allow a tax cut that will raise the deficit by 1.5 trillion dollars over ten years. In order to pass the Senate version of the tax bill without a filibuster, the bill must comply with those figures. So, does that mean that the tax cut will lead to a higher deficit? Strangely, the answer is no.
The rise in the deficit will be calculated by the CBO. That's the same CBO that tells us that elimination of the individual mandate in Obamacare would cause between five and six million Americans on Medicaid to "lose" their insurance. Remember, Medicaid is free for the patient. The CBO is saying that without the individual mandate (which has no effect on the availability of Medicaid), more than five million people will choose to drop out of the program. I would like the CBO to explain why a poor person getting free medical care would choose to get no medical care instead. There is no such explanation, and there is especially no way that nearly six million people would do that. Simply put, much of what the CBO comes up with is suspect to say the least.
But let's get back to the deficit. The CBO will calculate the effect of the tax cut using static scoring. What that means is that the CBO will look at the resulting revenue and expenditures without considering the economic growth that the tax cut will bring. A tax cut will push huge amounts of money into the private sector of the economy thereby raising both consumption and investment. That means a substantial boost to economic growth. An extra 1% annual growth in the economy over the next ten years means that the USA will be producing roughly two trillion dollars more of goods and services in the tenth year than it would without the tax cut. Normally federal taxes take roughly twenty percent of that total, so in year ten, we would see an extra 400 billon dollars in revenues for the government, revenues that the CBO is ignoring. Over ten years, those extra revenues which come from growth should total more than 1.5 trillion. In other words, the tax cut ought to lower the deficit, not raise it.
Now, all this is prediction of the future, so it has inherent risks. The CBO may be wrong. The dynamic scoring model may be wrong. Events may overtake both. For example, a ten year projection in 2000 would not have considered the effect of 9-11 or the resulting war on terror. Who knows what is coming in the next ten years? The best and most reasonable estimate of the effect of the tax cuts, however, is that they will not have a materially adverse effect on the deficit.
The rise in the deficit will be calculated by the CBO. That's the same CBO that tells us that elimination of the individual mandate in Obamacare would cause between five and six million Americans on Medicaid to "lose" their insurance. Remember, Medicaid is free for the patient. The CBO is saying that without the individual mandate (which has no effect on the availability of Medicaid), more than five million people will choose to drop out of the program. I would like the CBO to explain why a poor person getting free medical care would choose to get no medical care instead. There is no such explanation, and there is especially no way that nearly six million people would do that. Simply put, much of what the CBO comes up with is suspect to say the least.
But let's get back to the deficit. The CBO will calculate the effect of the tax cut using static scoring. What that means is that the CBO will look at the resulting revenue and expenditures without considering the economic growth that the tax cut will bring. A tax cut will push huge amounts of money into the private sector of the economy thereby raising both consumption and investment. That means a substantial boost to economic growth. An extra 1% annual growth in the economy over the next ten years means that the USA will be producing roughly two trillion dollars more of goods and services in the tenth year than it would without the tax cut. Normally federal taxes take roughly twenty percent of that total, so in year ten, we would see an extra 400 billon dollars in revenues for the government, revenues that the CBO is ignoring. Over ten years, those extra revenues which come from growth should total more than 1.5 trillion. In other words, the tax cut ought to lower the deficit, not raise it.
Now, all this is prediction of the future, so it has inherent risks. The CBO may be wrong. The dynamic scoring model may be wrong. Events may overtake both. For example, a ten year projection in 2000 would not have considered the effect of 9-11 or the resulting war on terror. Who knows what is coming in the next ten years? The best and most reasonable estimate of the effect of the tax cuts, however, is that they will not have a materially adverse effect on the deficit.
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