Tax Cuts Are Self-Financing, Says Bush’s Chief Economic Advisor

by Mike Godfrey, Tax-News.com, Washington

13 December 2004

Gregory Mankiw, chief of the White House economic advisory team, last week unveiled new research showing that tax cuts effectively pay for themselves through increased consumption, investment and growth.

Presenting a seminar at the Heritage Foundation, Mankiw described a method of calculating the cost of a tax cut known as ‘dynamic scoring’, which factors in economic growth and the increased income that is likely to ensue from tax cuts, effectively reducing the cost to the government.

Currently, the government and Congressional Budget Office relies on ‘static scoring’ when calculating the cost of a cut in taxation, a system that does not take into account future changes in economic growth. This system is therefore “very misleading”, argues Mankiw.

The White House adviser likened the process of dynamic scoring to the purchase of a new car, where the initial price does not reflect the discount that will be negotiated at the final sale. Moreover, he explained that some types of tax cuts, such as capital and dividend tax cuts, trigger a higher discount than others.

For instance, he explained that the discount on a cut in capital tax will equal around 50%, whereas labor tax cuts will produce a discount of 17%.

Critics of dynamic scoring contend that the system is too unreliable and artificially decreases the cost of tax cuts.

However, Mankiw disagrees:

"I think economists all agree there is a discount," he argued.

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