Dynamic Analysis at Last

"As a result of static analysis, revenue loss from tax cuts tends to be overstated, which makes it harder to enact tax cuts." -Steve Forbes before the President's Advisory Panel on Federal Tax Reform, 5/11/05

The U.S. Treasury announced last week that it would begin to dynamically analyze potential tax reforms instead of their typical static analysis that has proven wrong so often in the past.

What does all of this mean? It means that when the government assesses possible reforms, it will now use a more complex way of gauging the possible economic impact. It will take into account the change in behaviors of both individuals and businesses in a friendlier tax environment. Static analysis fails to account for this change of behavior, and the results of these studies are almost always devastatingly low government revenue projections.

Dynamic analysis factors in the economic growth that results from tax cuts - which typically expand the revenue base. Static analysis essentially says, "If we cut the taxes 20%, then we can expect to bring in 20% less revenue." This provides ammunition for big government politicians who claim that to cut tax rates would be "fiscally irresponsible" (how many times have you heard that one from the (D)'s in regards to the Bush tax plan?).

In actuality, a lower tax burden: 1. dashes the incentive to engage in tax fraud or utilize tax shelters or deductions; and, 2. spurs economic growth and personal spending, which leads to the creation of more jobs. What does this mean? Less people will cheat the tax system, and more people will be working (i.e. paying taxes). iMas dinero!

Take for example the 1997 rate cut on capital gains (28 to 20%). The Congressional Budget Office, using its typical static analysis, predicted that net capital gains realizations in 1997 would be $205 billion if the cut were enacted. Well, it was enacted, and actual capital gains realizations were $365 billion that same year...the government had underestimated the realizations by a whopping 78%. The same study predicted that by 1999, the government could expect to realize $228 billion in net capital gains.....the actual realization? $553 billion dollars. NOT BAD for government workers.

This news has been largely ignored by the general public, but be there no mistake about it: this could be a first step to massive tax reform. Expect liberals to claim that the administration is doctoring the numbers to justify their "tax breaks for the rich." Do yourself a favor and tune them out. There is a mountain of evidence that suggests that static analysis is ridiculously off-base...just like their attempts at class warfare.