The coming tax debate is likely to expose what critics contend is a relic of government fiscal analysis that has resulted in multibillion dollar miscalculations.
So many misestimates and of such magnitude, in fact, that the surprise factor has been eliminated. While the numbers are dutifully compiled, they are routinely discounted. They are expected to be off.Such as the fiscal year 1991 federal budget that contained a five-year forecasting error of $1 trillion.
Critics contend no household could survive miscalculating its revenues and expenditures by such a percentage. No corporate economist would hold a job after making equivalent errors. No lemonade stand would survive.
At issue is the matter of static vs. dynamic analysis.
Static analysis, as used by the Treasury, the Joint Committee on Taxation and the Congressional Budget Office, which assumes that no changes will occur in economic behavior as a result of changes in tax policy.
And dynamic analysis, which assumes that a tax increase or decrease will produce a change in the behavior of investors, savers and taxpayers, and that the change will be reflected in economic growth and government revenues.
Into this accounting dispute comes the Robert Dole tax-cut plan, which relies on lower taxes as a spur to economic growth, and relies further on an enlarged economy to produce greater, offsetting revenues.
By Dole's reasoning, individuals and companies will respond to the incentive, and the pace of economic growth will pick up sharply over the subpar 2.2 percent annual rate foreseen by the Congressional Budget Office.
In contrast, President Clinton's quick reaction on hearing the news was that it would "balloon the deficit, raise interest rates and weaken the economy." His supporters called it a "risky, last-minute scheme."
Which is it? The dawning of a new awareness of the economy's potential? Or a mindless plunge into fiscal disasters of the past? It is hard to imagine a bigger, broader issue, and static versus dynamic analysis is at its heart.
In contrast to their political identities, the Clinton viewpoint is by far the more conservative position. Proud of falling budget deficits, and believing his policies are the reason why, he sees dangers in tampering.
Seizing on statistical evidence that the economy may be operating below its potential, and convinced that taxes are the cause, Dole seeks to unburden taxpayers and simultaneously incentivize the entire private sector.
Supporters say that to believe such measures have no impact on those affected is illogical, and they point to heightened activity following tax cuts during the presidencies of John F. Kennedy and Ronald Reagan.
While a cause-effect relationship might seem obvious in the greater economic activity that ensued, critics point to the fact that budget deficits eventually followed, although the Vietnam War is blamed in the first instance.
The coming debate will, therefore, focus on the authenticity of a dynamic analysis vs. a static one, the former being relied on by Dole, the latter being at least partially identified with Clinton.
Dole's supporters contend that static analysis has in the past (and will, if allowed in the future) discouraged pro-growth policies because inevitably it views them nega-tively. In effect, they say, it is veto power over change.