Understanding a New Tax Issue

A New Yorker Magazine book review from Malcolm Gladwell starts with a cartoon drawing of two presidential advisors. Showing their clashing views of how to design Obamacare, the graphs they display are unbelievably complex and completely different.

Yogi Berra would have said, “It’s tough to make predictions, especially about the future.”

Dynamic Scoring

The article and Yogi took me to a new tax-related rule from the House. Called dynamic scoring, the rule requires the Congressional Budget Office to further emphasize macroeconomic tools for deciding the impact of new fiscal legislation in addition to its current micro-oriented approach.

Imagine a new tax on low quality toothbrushes. Using a micro lens, you focus on less tooth decay and fewer visits to the dentist. However, because the macro view traced the impact throughout the economy, we would note higher inflation, less employment and lower economic growth.

A vast simplification, our toothbrush example does reflect the Democrat/Republican split. Democrats say the current approach is more accurate while the new Republican House majority is “cooking the books.” The Republicans say that the micro method ignores crucial information. The Democrats assume that spending on research, education, infrastructure, healthcare, and entitlements help our economy. Republicans emphasize the economic growth from tax cuts that dynamic scoring could predict.

This graph only touches the micro and macro impact of the 2007-2009 recession that no one expected.

From: CBO

Our Bottom Line: Redistribution

Looking at 19th century Great Britain, economist John Stuart Mill (1806-1873) told the classical economists who preceded him that he had to tweak their thinking. Yes, he said we do have the laws of the market system. And yes, supply and demand do shape what we produce and how much we produce. But they do not necessarily dictate who keeps the income. Societies can reshape where the market takes them by using tax legislation to redistribute income. Concerned about incentives, though, Mill supported opposed progressive taxation and liked the inheritance tax.

Mill returns us to Yogi Berra, the Democrats and the Republicans. Yes, it’s tough to predict the future so maybe our philosophical outlook should be the explicit source of our conclusion. I suspect everyone can manipulate the numbers.