Friday, February 17, 2006

Political economics

This should be a new branch of the science of Economics; Political Economics. Weary of trying to convince everyone who'll listen that the key to a prosperous US economy is lower taxes the Festus White House is going to open a "tax analysis division" to utilize smoke an mirrors to establish the lower taxes mantra as a new reality.

Treasury officials said yesterday that the president's proposed Division on Dynamic Analysis -- with a handful of employees and a $513,000 budget -- would go beyond the government's old "static" methods of analyzing proposed changes in tax policy only in terms of their direct effects on certain affected taxpayers. Instead, "dynamic" analysis looks at how tax changes cause consumers and businesses to behave differently in ways that affect the overall economy's growth.

For example, a tax break to encourage business investment might lower some individual companies' tax bills -- looking like a hit to Treasury revenue under a static analysis. But if that tax cut caused businesses to buy more equipment, hire more workers and increase profits, that might contribute to stronger overall economic growth -- causing the employees and companies to pay more in income, sales and other taxes over time.

The flaw in that reasoning is twofold. Festus keeps lowering taxes to the point where stronger economic growth simply will not generate enough tax revenue to make up for the shortfall. The other flaw is that the spending side of the federal budget is ignored.