What Is a “Static” Revenue Analysis?

I seem to have a disagreement with Jason Furman here:

@paulkrugman: Brad is right here: Mankiw et al have clearly made a math error

@jasonfurman: Not seeing the math error. Mankiw said static. His soln is right for static (defined as unchanged base)… And dynamic version is higher.

I was taught the definition of “static” by the Jedi Masters at OTA in the early 1990s, on those rare occasions when they would deign to provide oracular pronouncements to those of us in OEP trying to understand their work. The Jedi Masters insisted that “static” analyses were those that did not incorporate what were essentially political-ideological views about the effects of policy changes on GDP. “Static” thus means stable overall capital stock and GDP growth paths.

But that does not mean that “static” analyses assumed no changes in behavior. OTA strongly believed that people responded to tax law changes. Income would be shifted from one category to another. Asset prices would change. Thus tax bases would vary.

Thus, Jason, when you say “Mankiw said ‘static’. His soln is right for static (defined as unchanged base)…” you give the game away. “Static” has never—not in OTA-land, JTC-land, CBO-land, or OMB-land—been defined as an “unchanged [tax] base”.

If you want to say: “In addition to making the inappropriate modeling choice of taking the US to be a SOE, and in addition to setting forth an incomplete model in which the policies that close the hole in the government budget constraint are ignored, Mankiw also cooks up his own definition of ‘static’ that does not apply to OTA or JTC analyses…” then be my guest.

But if you want to allow people to think that Mankiw’s “static” has something to do with the revenue loss estimates that will be produced by JTC, I do not think that’s wise…

Note: Yes, the “dynamic” ratio of dw/d(TR) is higher than OTA’s or Mankiw’s “static” ratio. My point is that in Mankiw’s (poor choice of model) SOE setup, OTA’s dw/d(TR) = 1 by necessity: that’s what no rents and fixed required rate of return on capital get you. And Mankiw’s dw/d(TR) = 1/(1-t) is not a fact about the world—about how their are efficiency gains from cutting tax rates that flow to labor when you assume 100% of the incidence of the CIT is on labor—but is an artifact of his assumption that “static” means not just a fixed capital stock but fixed asset prices and returns.

I think that—as former political appointees who owe the career staff at OTA a great deal—our proper response to Mankiw should be “he gets ‘static’ wrong”, rather than letting Mankiw define “static” as he wishes and thus introduce confusion with respect to what OTA and JTC are doing. But it is clear that opinions differ here…