Saturday, August 3, 2013

CBO Presentation On Using Data For US Budget Projections

Several things to note about the following CBO presentation on budget projections:
  • CBO uses a 10-year window for analysis. Politicians can manipulate the projected budgetary outcome of legislation by front-loading the revenue part of the legislation (new or higher taxes, fees, etc.) and delaying major expenses of the legislation, so some or all of the costs are past the 10-year window. If Congress enacts legislation that will raise $100 per year for the first 10 years then cost a million dollars in year eleven, the legislation will be projected by CBO to reduce the deficit by $1000 (10 x $100). CBO will ingore the million dollar expense in year eleven as part of its 10 year projections.

  • CBO assumes the current law remains the same in projecting out ten years. If a law will end in a couple of years, CBO assumes it will end then, even if history shows Congress will repeatedly extend the law. Likewise, CBO assumes all provisions of a proposed law will be in force and not waived or overridden after the law is passed.

  • CBO measures the revenue from tax increases in a static economic environment. Taxes are modeled as if tax increases and decreases do not affect economic output, investment or labor. A 10 percent increase in the tax rate is projected to increase tax revenues by 10 percent and likewise a 10 percent decrease in tax rates is projected to decrease tax revenues by 10 percent. In reality, the economy's output, investment and labor are affected by tax rates, but not on a one to one basis. This effect is not modeled by CBO as part of its projections.
From Congressional Budget Office, "How CBO Uses Data for Budget Projections and Cost Estimates" by Jeffrey Holland:

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