Aren’t they saying, “The tax cuts are good for the economy. The tax cuts will be really good for the economy with reduced spending. The tax cuts will be less good for the economy with increased spending. But the last thing you want to do is make the tax cuts temporary.�

Now only an ingenious, eternally optimistic mind can turn that into, “See, the tax cuts aren’t any good.� But Sean, I appreciate the discussion and the post.

Treasury tried to explicitly *not* insert itself into the battle over whether Bush’s tax cuts can pay for themselves; they say as much in the introduction to the report.

But then they went and used a model under which making the tax cuts permanent, without an offset in spending, would bankrupt the government. This wasn’t an explicit feature of the model, as I understand it; it’s a consequence. So according to Treasury, what they consider the best economic model for their purposes shows that the tax cuts won’t pay for themselves.

You can dismiss that as a weakness of the model, but then you have to dismiss or at least reconsider the conclusions of the report, since it is based on that model.

I read page 8 (and it is possible we are reading different things), but it seems to be describing a necessary assumption of the “model” that was used. In other words, the model does not work (or “converge”) if one doesn’t recognize a perfect equilibrium between taxation, spending & deficit. In other words, it assumes for the purpose of comparing federal financing methods that financing will be necessary (either via tax increases or reduction in spending is necessary). This is a logical assumption that would have to be made, otherwise there is no purpose in comparing methods of federal financing. But I am still not seeing the part where the study simply declares that the tax cuts, in reality, have not able to pay for themselves — or another way of putting it — have a minimal economic effect. I just don’t see it. I see a qualifying theoretical assumption for purpose of using an economic model.

Sean, if you can quote the specific part that supports your & Furman’s interpretation, I would really appreciate it. I could just be missing it.

Also, let’s not forget some of the assumptions inherent in the model: it assumes full employment of economic resources, ignoring the effect that government tax policy has on such employment. It minimizes international money flows — a big deal, since our huge debt could erode investor confidence in the United States. The model is also sensitive to assumptions about how people and businesses will react to changes in wages, inflation, interest rates, etc.

Some of these are necessary features of most models. But to truly assess the validity of the projection, you have to examine the underlying assumptions. I’m bypassing that step because I assume Treasury’s model is, on balance, favorable to supply-side theory. I’m giving them the benefit of the doubt and examining their conclusions, not their method.

The real question is, does the increase in economic growth justify the debt taken on to generate it? To calculate that you need to measure how the increased economic growth would translate to increased federal revenues.

On Page 8, Treasury notes that a permanent tax cut without offsetting spending cuts would destroy federal finances. In other words, the tax cuts do not pay for themselves. At some point you either have to raise taxes or cut spending.

So what they’re saying isn’t that cutting taxes pays for itself; they’re saying that in the long-run making the cuts permanent AND reducing spending to compensate would increase economic output by about 0.7 percent over the alternative: making the cuts temporary.

What they ignore is the time frame for paying off the debt incurred — it’s measured in decades even under the best circumstances. They consider the debt manageable if it’s size as a share of GDP remains constant. Their scenario assumes ever-growing federal debt.

That’s bad enough. But if the Republicans remain true to recent form, they will make the tax cuts permanent without reining in spending. Thus destroying federal finances.

Furthermore, looke here http://www.whitehouse.gov/omb/budget/fy2007/ the document this Furman supposes cites for page 2 & 3 “box” — can some point me to this guys fantastic revelation? Because I can’t find it.

I’m looking for a PRIMARY Source.