Watch: The Paradise Papers – Secrets Of The Global Elite

One of the central debates on the Republican tax reform proposals is how much their plan will “cost” the government.  This begs the question as to why not taking as much of people’s money as you previously intended to take is considered a cost, but we’ll leave that aside.  Republicans argue that any tax proposal ought to scored dynamically, that is, to model how the tax changes will affect individual and firm behavior.  They argue that improvements in the tax system will increase economic activity and therefore create additional taxable activity.  While the tax rate is less, there will be a larger base of economic activity and thus the “cost” of the tax change is less than under static scoring, which assumes no change in behavior.  The Democrats argue that we ought to score any proposal based on no change in behavior, since that is a more fiscally conservative approach.

But Mr. Wyden is sharply critical of the bill Republicans are drafting now, which he said includes gifts to big businesses and the wealthy, “funny math” for budget scoring that will assess the cost of the plan, increased deficits and “a bunch of false promises to the middle class.”

While I applaud fiscal conservatism generally, call me suspicious that concern over the deficit is their primary concern.  The effect of static scoring is effectively to kill any tax cut, while making any tax hike positive.

Economists have long argued that however much good or ill the government can do for the economy, the government can powerfully effect the incentives to work, save and invest.  As the old adage goes, if you want more of something, subsidize it, if you want less of something, tax it.  Now progressives (and some conservatives) fully understand this principle when applied to something they don’t want (e.g., cigarette smoking), or when they want to support something they like (e.g., green energy).  But when it comes to income taxes, they say we must insist there will be no change in underlying economic behavior, at least in how we score tax proposals.  This brings us to the Paradise Papers, which strangely enough are not getting as much press as I expected (or hoped for).  The Paradise Papers were released by the International Consortium of Investigative Journalists, who effectively “outed” a large number of famous corporations and individuals who are shielding money from taxation through off-shore entities (as in the Cayman Islands).  This includes the Queen of England, Madonna, Apple Computer, and Wilber Ross (President Trump’s Commerce Secretary).  Now there is no suggestion that what these individuals and firms have done is illegal, but what it does prove is that people will change their behavior to avoid taxes.  This should be a relatively non-controversial conclusion; indeed it should be patently obvious.  Yet those that insist that we score any tax proposal statically are effectively denying this obvious reality.

Now there is a basis for challenging “how much” we expect behavior to change.  It is true that some overzealous politicians have claimed that tax cuts will “pay for themselves.”  Only in very high taxation regimes is this likely to be true, so we can call any claims that the tax cuts will “pay for themselves” as dubious as claims that we won’t see any change in economic activity.  I remain hopeful that some sort of tax reform will pass, and it will lead to higher economic growth.  We can’t continue the previous decade’s 2% growth rate and solve the fiscal problems we have.