March 20, 2010

Graphic of the Day

Professor Mankiw suggests a warning label for CBO scores:

warninglabel.jpg

In the discussion of out and out lies and gimmickry used to game the CBO numbers, both Larry Kudlow and Mankiw remind that the CBO by definition scores statically (their Laffer Curve is flat). They can score an increase in taxes to 110% as revenue and not account for any loss from people who would prefer not to pay to go to work every day.

Indeed, to be very wonkish about it, these tax changes could have especially large GDP effects. Some people like to argue that taxes have small GDP effects because income and substitution effects offset each other. But if you give someone a subsidy and then phase it out, both the income and substitution effects work in the direction of reducing work effort.

Why does CBO assume no change in GDP? It is not because the CBO staffers necessarily believe that result. Rather, it is just one of the conventions of budget scoring.


Health Care Posted by John Kranz at March 20, 2010 11:27 AM
| What do you think? [0]