Ceteris Paribus

Ceteris Paribus is an important concept in economics. It means "all other things remaining equal". In experiments, this allows you to isolate the effect of a single independent variable. In real life, this is usually a silly assumption -- unless you work in government. Congress, for instance, uses the Congressional Budget Office to estimate the impact of various budgetary and tax changes. But they instruct them to use the assumption of Ceteris Paribus in their computations. This means that when Congress proposes to change or introduce a tax , they assume that there will no changes in behavior on the part of the taxed. This, of course, is utter nonsense and leads to all sorts of bad decsions.

Take, for instance, the tax rate reductions that Congress passed in 2003 (aka The Bush Tax Cuts or Tax Cuts for The Rich). The CBO made the dire prediction that Federal income tax revenues would fall as a result. And, if people actually didn't change behavior, they would have been right. But here's what actually happened to individual income tax revenues (in millions of dollars)

2003	$793,699
2004	$808,959
2005	$927,222
2006	$1,043,908
2007 estimate	$1,168,846

Source: US Office of the Budget

Now Democrats in Congress are busily engaged in trying to raise these very same tax rates. Why? In order to generate more revenue. Really? How? Using the very same incorrect assumptions that have "fooled" them before.

There are only two possible conclusions one can draw from this:

1. Democrats are just plain stupid.
2. Democrats get more "utility" (as economists would say) from being demagogues on the issue than they do from additional revenue.

I tend to go with #2, but a persuasive case can be made for #1 also.