Facing Reality

One of the main reasons those of us who understand numbers have never taken seriously any of the financial statistics coming from our rulers in DC is the method by which they make their calculations. They have long used assumptions that are so far removed from real life as to be considered absurd in the finance department of any private sector company. Our rulers use what is called static analysis, which assumes that they can mess with the tax codes all they want and people will not alter their behavior any. Nothing could be further from the truth.

What really happens when the tax laws are modified is that people and companies do make dramatic changes in what they do. The only realistic way to measure the effects of tax law changes in the real (not DC fantasy) world is to use what is called dynamic scoring, as explained in this article from the Heritage Foundation.

There is no better comparison between the two methods than the Reagan tax rate cuts of the 1980s, which are constantly mischaracterized by the lefties. With a static analysis, cutting the tax rates would result in less money for the Feds, which is the impression that the liars want to give. This assumes that people and companies will have the same amount of income to be taxed. Reality was very different. With lower tax rates, people and companies had more incentive to report higher taxable income. The actual dollars to DC more than doubled as a result.

Anyone in the media or in power in government who bases any argument on a static analysis is either a liar, an idiot, or both, and not to be trusted.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/05/2002 02:56:00 PM Send this post: