Tuesday, November 6, 2012

Congressional Analysis Of Tax Law Changes Is Biased Against Tax Rate Reductions

My comment to the blog, Econbrowser, "The Choice: Math vs. Anti-Math in Fiscal Policy" by Menzie Chinn, Professor of Public Affairs and Economics at the University of Wisconsin, Madison:
Unfortunately, CBO's and JCT's [Congressional Budget Office and Joint Committee on Taxation] methodology is biased against tax and government spending reductions and biased in favor of tax increases and government spending increases. For legislative consistency, CBO uses JCT's analysis of tax law changes in its own analysis of proposed legislation effects.
To quote JCT from its own testimony and document (JCX-48-11, Sept 21, 2011) (and JCT has said the same thing for many years):
One of the conventions that is followed for both revenue estimates prepared by the Joint Committee staff and expenditure estimates prepared by the Congressional Budget Office is that they are done against a fixed forecast of aggregate economic activity; the Joint Committee staff generally assumes that a proposal will not change total aggregate production and therefore holds forecasted Gross National Product (“GNP”) fixed....the Joint Committee staff generally assumes a fixed GNP forecast;
JCT assumes for revenue projections that a tax increase will never reduce aggregate economic activity (GDP) and a tax reduction will never increase aggregate economic activity (GDP): a tax reduction does not produce increased tax revenues from higher GDP and a tax increase does not reduce tax revenue from decreased GDP.
Obama's proposals are tailored to game the rules used by JCT and CBO to reflect a Congressional mythical view of the US economy that favors increase in taxes and government spending. Romney's proposal's general concept, which is not modeled by CBO and JCT, is that there are incentives and disincentives reflected in the tax code that increase and decrease economic activity such as private capital investment, workforce participation, work hours, business formations, etc., which have real GDP effects.

Under the current JCT-CBO methodology, reformation of the tax code to provide increased GDP growth through greater private investment incentives, increased workforce participation and increased work hours without losing tax revenue is impossible.

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