Sunday, February 9, 2014

The CBO bombshell

In the world of public policy, the Congressional Budget Office's recent finding that Obamacare will weaken economic growth and reduce future employment is like an earthquake of magnitude 8. Finally, finally, the CBO has introduced dynamic assumptions into its models of how the economy responds to existing and proposed policies. (Supply siders have been waiting for this moment for decades.) Before, the CBO would assume that a 10% increase in tax rates would translate into a 10% increase in tax revenues. Now and forevermore, we hope, they will calculate how much the higher rate is likely to depress economic activity (e.g., higher marginal tax rates are likely to cause a reduction in the tax base that could offset all or part of the increase in tax rates). The CBO now acknowledges that Obamacare will hurt the economy because it creates incentives for people to work less. The phasing out of Obamacare subsidies will act as a new marginal tax on work, and whenever you raise taxes on some activity, you should expect to see less of it.

We've known about the higher marginal tax rates hidden within Obamacare's complexity for a long time. What's new is that they are now officially acknowledged by the CBO.

The back story of how this sea change came about can be found in a fascinating WSJ interview of Casey Mulligan, "The Economist Who Exposed Obamacare." Clip this story and file it away so you can show your descendants that you were there when the course of public policy and economic history changed for the better.


The chart above (from the Mulligan interview) is one answer to the question "Why has this been the weakest recovery ever?" Average marginal income tax rates have increased by 15% since 2008, from 40% to 46%, and will increase to 47% next year thanks to the ARRA's "stimulus" spending (over 75% of which consisted of income redistribution) and Obamacare. This comes on top of the huge increase in regulatory burdens occasioned by Dodd-Frank and Obamacare.

The average working-age person in the U.S. now faces the prospect of keeping only 54% of any additional income he or she earns. It's no wonder the economy has lost a lot of its vitality. Some workers today even face the harsh reality of keeping less income despite working and earning more (i.e., they will face marginal tax rates in excess of 100%). My own effective marginal tax rate is over 65%, and that is a powerful force that keeps me from working: I have no desire to hand over two-thirds of any additional income I make to the government.

A few excerpts from the interview:

... the CBO ... reported that by 2024 the equivalent of 2.5 million Americans who were otherwise willing and able to work before ObamaCare will work less or not at all as a result of ObamaCare.

Mr. Mulligan's empirical research puts the best estimate of the contraction at 3%.
... "implicit marginal tax rates" in ObamaCare make work less financially valuable for lower-income Americans. Because the insurance subsidies are tied to income and phase out as cash wages rise, some people will have the incentive to remain poorer in order to continue capturing higher benefits.

The good news, from a forward-looking perspective, is that CBO's new method of dynamic scoring will make tax cuts easier. Before, CBO assumed that tax cuts were automatic losers no matter what; now they will assume that tax cuts can help pay for themselves by increasing economic activity. The economy is crying out for tax reform—particularly a reduction in the grievously high corporate income tax rate. So with the relatively low level of the federal deficit these days and CBO's new dynamic scoring methodology, we could see some very positive changes (e.g., lower marginal tax rates for businesses) in the future. And that, in turn, could revitalize the outlook for economic growth.

11 comments:

Benjamin said...

Obamacare is too complicated, and does not directly tackle the difficult issue of how to care for people who are both aged and terminally ill.
As for marginal federal income tax rates, they are too high. The lion's share of federal income taxes are eaten up by just three agencies: DoD, VA and DHS. Oddly enough, the sacred cow VA is federally financed health care in federal facilities staffed by federal employees for former federal employees--Karl Marx would approve.
Astonishing fact of the day: the 3.7 million veterans who receive monthly disability checks adding up to $57 billion both outnumber and have more income than minimum wage workers in the private sector.
Yes, eliminate Obamacare...and the VA.

William McKibbin said...
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Scott Grannis said...

This is not a post about the merits or lack thereof of Obamacare. It's about a huge change in the way the CBO scores the economic impact of changes in public policy. As I've noted repeatedly for the past four years, Obamacare is fatally flawed.

Unknown said...

I can't believe for one minute anyone really knows what effect Obamacare is going to have on the economy.

The CBO is not omniscient.

DocColorado said...

Scott, excellent article and thought again!

I hope your correct about the CBO looking at tax increases/decreases the way you described.

Is there a "score card" on the CBO Accuracy? A look back in time to determine what operative was the most accurate/Inaccurate?

again thanks for the analysis.

Scott Grannis said...

The CBO has a horrible record of forecasting the economy (perhaps because their assumptions have been devoid of dynamic analysis). But the important thing is that their forecasts are used to determine the "cost" of proposed legislation, which in turn influences how policies are designed in the first place, and which policies are likely to get broad political support.

Johnny Bee Dawg said...

The dynamic CBO methodology changes are wonderful. However, the nightmare effect CBO predicts ObamaCare will have on employment is being met by Orwellian DEMs telling us that less jobs will be good for family time.

What? No job means you can't afford your outrageously overpriced ObamaCare premiums?? No worries! The rest of the citizens who are too busy working so you can "pursue your dreams" will chip in and subsidize you!!

I'd like to hope ObamaCare is fatally flawed, but I don't get the feeling 51%+ of Americans care so much about their loss of Liberty from ObamaCare, and about becoming increasingly dependent on Government for their very lives. I think they are just fine with all that as long as they feel somebody else is picking up the check.

In previous Communist revolutions the ones who complained about loss of Liberty were slaughtered. Or at least re-educated off at summer camp. Not sure how this one will play out, but a lot of DEM officials have sounded like the Ministry of Love this week, in response to the CBO results.

William McKibbin said...
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William McKibbin said...
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William McKibbin said...
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Hans said...

Good posts by Ben Jamin and Johnny..

"The CBO has a horrible record of forecasting the economy (perhaps because their assumptions have been devoid of dynamic analysis)."

This is very true.


"But the important thing is that their forecasts are used to determine the "cost" of proposed legislation, which in turn influences how policies are designed in the first place, and which policies are likely to get broad political support."

Few other than Tea Leafer care about continues increases in governmental unit spending much less the ever massive deficit. Any CBO speak is just used as political taking points and not much more as both parties have in the main support increased spending.

If their forecast are so bad, why does any one bother with them?

What if any political slants are directed from the CBO itself?

"Before, the CBO would assume that a 10% increase in tax rates would translate into a 10% increase in tax revenues."

Does this orthodoxy give anyone pause? Is it only now, that they understand that when you tax someone more you get less of it.

"The CBO now acknowledges that Obamacare will hurt the economy because it creates incentives for people to work less."

It took the CBO this long to understand that welfare destroys incentives? What else do they not understand? This is fundamental human behavior that these highly educated men and women do not comprehend.

Does anyone have confidence in this governmental unit? If you do, we are in dire straits.

"The good news, from a forward-looking perspective, is that CBO's new method of dynamic scoring will make tax cuts easier."

I hope you are right, Mr Grannis, but I would strongly bet against that outcome.

"Before, CBO assumed that tax cuts were automatic losers no matter what; now they will assume that tax cuts can help pay for themselves by increasing economic activity."

How daft are these people whom staff the CBO? Even children in Head Start know the difference.

"The economy is crying out for tax reform—particularly a reduction in the grievously high corporate income tax rate."

Crying for over a half century and without a massive change in the Beltway, it will be another half century if ever as political corruption had infested the body politic.

A new methodology will not fix they long and systemic problems, but simply and practical common sense will.

Time is fleeting and the CBO as scorekeeper will matter little in the Byzantine world of WDC.

CBO and it's projections

http://research.stlouisfed.org/publications/review/12/01/21-40Kliesen.pdf

CBO and corruption

http://www.zerohedge.com/news/terminated-cbo-whistleblower-shares-her-full-story-zero-hedge-exposes-deep-conflicts-impartial-