Hooray! At Last! Dynamic Analysis!
Jude Wanniski
June 5, 1997


We have just received a copy of a June 3 letter to the Congressional Budget Office, signed by Senate Majority Leader Trent Lott, House Speaker Newt Gingrich, and House Majority Leader Dick Armey, asking CBO Director June O’Neill to estimate the growth effects of the tax legislation that will emerge from the House Ways&Means and Senate Finance committees. This is an enormous victory for Jack Kemp, who threw himself into the project at exactly the right moment, when there was almost universal doom and gloom that dynamic analysis was a dead letter. The instruction to O’Neill almost certainly means there will be a widening of the revenue projections attributable to a capital gains exclusion. Every 0.1% increase in GDP is worth $35 billion over five years, according to the Joint Tax Committee, so if CBO comes up with that minimal amount, it would be locked into the budget reconciliation this year. It would thus grease the wheels at every level of the budget process, making it virtually impossible for the White House to fight. In my view, the President should welcome the decision, as it neutralizes the liberals in his party who have been pushing him to fight capital gains cuts on the grounds that even if revenues are unlocked by a temporary cut, there will be “timebomb” losses beyond the five-year estimating period. With a growth dynamic, there is no timebomb, only growth as far as the eye can see. This means that Ways&Means Chairman Bill Archer may not have to terrorize all corporate socialists, including the ethanol crowd, to make ends meet, and all corporate socialists will of course have an immediate stake in supporting the GOP and dynamic analysis. Here is the heart of the letter:

“The Congressional Budget Office estimates that balancing the budget and keeping it balanced will allow the economy to grow faster. CBO incorporates these growth effects into its economic assumptions and estimates the feedback effects on spending, revenues and the deficit....CBO labels this feedback effect on the budget a ‘Fiscal Dividend.’ It amounts to $77 billion over five years. In the midst of concluding budget agreement talks with the President last month, CBO announced ‘windfall’ revenues of $225 billion over five years, the result of underestimating economic performance. Clearly, small improvements in economic performance lead to considerable increases in revenues.

“We believe, in light of these precedents, the types of changes in tax policy and tax cuts currently under consideration by the Committees on Finance and Ways & Means will produce similar positive economic results. For example, there is widespread agreement that reducing the capital gains tax and indexing gains for inflation will produce such results. Indeed, Federal Reserve Chairman Alan Greenspan has testified to the effect that an elimination of the capital gains tax would probably increase federal revenues overall. We believe it would be exceedingly useful for CBO to estimate the positive economic effects that will result from cutting the capital gains rate in half, and indexing gains for inflation. In addition, we would like CBO to estimate the economic effects of the overall package of tax policy changes and tax cuts before the committees. We also ask that CBO estimate the budgetary feedback effects on spending, revenues and deficits of the economic effects, i.e. the ‘growth dividend’ due to changes in tax policy. Please incorporate in these estimates of the growth dividend the change in revenues due to ‘unlocking’ that the Joint Committee on Taxation estimates will occur as a direct result of reducing the capital gains rate and of indexing. We would suggest that this complete analysis be incorporated in CBO’s mid-year re-estimate of the budget. Thank you for your attention to this important matter."