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CBO’s Static Cap and Trade Analysis

Politico’s Darren Samuelsohn transcribed a recent report from the Congressional Budget Office on the Democrats latest cap and trade energy tax bill for Politico July 7th:

The CBO analysis of the American Power Act, championed by Sens. John Kerry (D-Mass.) and Joe Lieberman (I-Conn.) found that government revenues would grow by about $751 billion from 2011 to 2020 if the bill became law. By contrast, the legislation would create direct spending of $732 billion over the same 10-year period.

This is all true, but Samuelsohn ignores some elementary criticism of how the CBO is forced to score legislation by Congress. The Heritage Foundation’s David Kreutzer explains:

Here’s a principles-of-economics question: Suppose the U.S. gross domestic product (national income) is currently $14 trillion. Then suppose the U.S. raised all tariff, income tax, and sales tax rates to 100 percent. How much money would the government collect? If you realized that nobody would generate taxable income under such a regime and answered “zero,” congratulations.

If, instead, you answered $14 trillion, you may have a future at the Congressional Budget Office (CBO), because that is how they analyze (score) the fiscal impacts of the Kerry–Lieberman climate change bill. In defense of the many good economists at the CBO, the Kabuki Theater of legislation-scoring requires they use static analysis—that is, they have to assume that higher tax rates do not affect investment or work-effort decisions and, therefore, have no negative impact on national income and income-tax revenues.