Long run taxes and growth BS

By Dave Anderson:

I am grabbing the following two images from Brad Delong, and he is getting the data from the Congressional Budget Office's fifty year fiscal projection.

The first image assumes that Congress behaves itself and actually follows current policy

 

Brad notes where the change is coming from:

These are the numbers if from now foreward the U.S. Congress sticks to
PAYGO: if everything that increases the deficit, either by boosting
spending or cutting taxes, is paid-for by savings elsewhere in the
budget. The estimated extended-baseline 50-year fiscal gap last summer
was 2.6% of GDP. Today it is 0.8% of GDP. That is a big swing to see in a
year....

Last, another piece of the PPACA: the excise tax on high-cost health
plans to make it painful and costly for insurance companies not to worry
about containing costs. This raises a lot of money by 2050 in CBOs
projection.

And now the Bad Congress estimate where reality be damned and nothing that is ever lobbied for is made to pay or lose their subsidy:

What is in this forecast?

Basically, all of the cost-saving and revenue-raising provisions of
the PPACA--of the Obama health care reform. The CBO's alternative fiscal
scenario assumes that all of these come to an end in 2020: that they
are then repealed or loophole-riddled so much that thereafter the growth
of federal medical spending resumes growing rapidly at the same rate
that they forecast last year.

In short, CBO is now saying to the Congress: we know you passed these
provisions--the Medicare reimbursement provision, the tax on high-cost
health insurance plans, the constraints on the growth of the subsidy
pool for working- and lower-middle-class Americans. We don't think that
they are going to last.

But in the good scenario, the size of government is 2 points of GDP smaller than in business as usual, and to paraphrase Friedman, the expenditure side of the balance sheet is the relevant metric for long term taxation expectations as eventually expenditures will equal taxation unless there is a massive default or inflation, which is just as bad or worse from the point of view of current decision making.

Arguments that businesses are not spending, and consumers, especially rich consumers, are not spending because they fear higher tax rates in the future due to Obama's domestic policies are bullshit.  Those policies dramatically reduced projected federal expenditures over the intermediate to long term.  And using a logic of perfect rationality, those policies 'should' marginally encourage spending today.  I don't buy perfect rationality as an operating assumption, but the models that the pundits are 'using' to make the claim that spending is depressed because of concern over higher taxes in thirty year incorporate that assumption with a rather low discount rate.