I get very irritated when people, even intelligent people, who I respect greatly, use the phrases "tax cuts" and "tax-rate cuts" interchangeably, and one of the things that I'd do if I were King would be to outlaw this.

But because so many are unfamiliar with the difference, the administration has managed to pull a fast one on the Beltway. They are going to require an analysis of tax proposals by scoring them dynamically, rather than (absurdly) they've done in the past, statically. What does this mean?

In the past, any time the CBO or GAO did an analysis of a proposed change in tax rate changes, they assumed that said rate changes would have no effect on the growth rate of the economy, either in the general economy, or in the specific economic sphere in which the tax change would take place. Anyone familiar with economics knows that such an assumption is...to put it gently...nonsense.

We can't necessarily know what the effect of a tax rate change will be on an economic sector, but to assume that it will be nil is ridiculous.

So, people who are "scoring" (that is, attempting to estimate what the revenue effects of a proposed tax change will be) will now have a more difficult job--they will have to attempt to estimate what the effect of the tax change will be on the affected economic sectors when coming up with their estimate of revenue change for the federal government.

Will they get it right? Who knows. But at least now, they'll have to make the attempt, instead of absurdly assuming that the effect is zero. It will also provide one more thing to argue about when we attempt to reduce tax rates, but since it will also have that effect on attempts to increase them, that's a wash, in my opinion. At least it will force a debate on the subject, and make it a respectable topic of discussion.

What always irritates me in the whole debate about taxes is this:

Why is tax policy not formulated based on trying to optimize revenue?

Instead, all we hear is, "tax the rich, they can afford it" or "tax corporations, they can afford it" or "cut taxes, it will stimulate the economy". No one ever seems to have tried to analyze these changes from the optimal revenue viewpoint!

Plus, they never want to make actual cuts in spending. The most they ever do is cut the planned rate of increase.

Even a specific goal of tax revenue maximisation would work, resulting in major tax rate cuts and reductions in compliance costs.

Perhaps we need to split government in two, strictly enforcing the separation of government revenue gathering and expenditure.

"We can't necessarily know what the effect of a tax rate change will be on an economic sector, but to assume that it will be nil is ridiculous."

But if we truly can't know, then why not assume that the possibility of increasing revenue is equal to the possibility of decreasing revenue, and that the net effect will be nil?

Because there's little historical evidence that the effect is ever nil. We can't truly know, but we can make an estimate, and the one thing that we can know almost for certain is that it isn't nil.

> Why is tax policy not formulated based on trying to optimize revenue?

Because control is one of the goals of tax policy, as is rewarding friends and punishing enemies.

Actually, all of the above is wrong. The goal of tax policy is to get re-elected.

There was a fairly serious study performed in New Zealand around twenty years back that found that the optimal tax rate as a proportion of GDP for tax revenue maximization was 20-25%, (in practice I think it is still over 40%). I suspect this optimal figure would be somewhat less now, especially in the USA. Many eastern block countries have recently adopted flat tax rates lower than 20%.

Tax is a little like a credit card for the government. Unfortunately the government can not stop itself from over borrowing to the max in spite of the severe economic consequences of continually living in credit card hell.

Interestingly, 20% of GDP is about as much as the US government has _ever_ been able to take in tax revenue, irrespective of the level of tax rates. Here's the background.