WASHINGTON (Reuters) - The new Republican-appointed director of the Congressional Budget Office delivered some bad news on Tuesday to the party’s “Reaganomics” devotees: Tax cuts don’t pay for themselves through turbocharged economic growth.
Keith Hall, who served as an economic adviser to former President George W. Bush, made the pronouncement at his first news conference after the CBO reduced its 2015 budget deficit forecast by $60 billion.
“No, the evidence is that tax cuts do not pay for themselves,” Hall said in response to a reporter’s question. “And our models that we’re doing, our macroeconomic effects, show that.”
His comment is at odds with lingering economic theory from the 1980s that some Republicans still hold dear: Stronger economic growth generated by tax cuts would boost revenues so much that there is less need to find offsetting savings.
Even though major tax cuts in the early 1980s and early 2000s ended up boosting deficits while also propping up short-term growth, many Republicans cite the growth argument as a major motivation to cut tax rates as part of a tax reform effort.
In a move partly aimed at making the numbers work better, Republicans who control both the House and the Senate appointed Hall to run CBO. He replaced Democratic appointee Doug Elmendorf. Hall was given a mandate to incorporate macroeconomic effects more fully in the agency’s cost estimates, a process known as “dynamic scoring.”
Thus far, this has had some effect in reducing the estimated costs for some legislation, but the difference has been small.
Under the CBO’s traditional “static” scoring method, a bill to extend a package of expired business tax breaks for two years would boost deficits by $97 billion over 10 years. Under dynamic scoring, the increase would be less at only $87 billion, but still a substantial cost to the Treasury.
Hall said the $87 billion figure is likely to be more accurate because it captures macroeconomic feedback, but he noted that this could make the estimate more uncertain because “there’s a lot of unknowns there.”
The new CBO director, who previously headed the Bureau of Labor Statistics and was the Commerce Department’s chief economist, did issue a standard CBO warning that was sure to please Republican fiscal hawks: The ever-rising federal debt is on an unsustainable path.
Reporting by David Lawder; Editing by Dan Grebler