Dec 05, 2017

5 Reasons to be Skeptical of the Joint Committee On Taxation Estimates

Post by Freedom Partners

In a July 2010 editorial The Wall Street Journal asked whether Congress “should simply cut out the 535 middlemen and let [the Joint Committee on Taxation] write the tax laws.” JCT’s “revenue oracles are among the most powerful people in Washington on tax policy,” the piece added.

The problem with the power and influence wielded by JCT is that it has a track record of underestimating economic growth and revenue returns from tax cuts, and in effect the promise of making pro-growth tax reform a reality in 2017 has met resistance over deficit concerns.

JCT Has a History of Underestimating Positive Economic Responses to Tax Reform

How far off has JCT been off on its projections? By nearly half a trillion dollars.

“So how well did Joint Tax do when it predicted a giant revenue decline from the 2003 investment tax cuts? Not too well. We compared the combined Congressional Budget Office and Joint Tax estimate of revenues after the 2003 [Bush] tax cuts were enacted with the actual revenues collected from 2003-2007,” The Wall Street Journal explained

According to the data, “In each year total federal revenues came in substantially higher than Joint Tax predicted—$434 billion higher than forecast over the five years.” In fact, “[t]he 44% increase in revenues [from 2003-07] compares with a 25% average over the last 30 years. Tax revenues increased by 12% in 2006, the second largest single year gain in revenues in 25 years. The highest was 15% in 2005.”

Economist Art Laffer recently told Fox News that “phony accounting system done by the Congressional Budget Office and by the Joint Tax Committee underestimate [the benefits of] tax reform.”

LAFFER: “What you’re worried about here and what all these other people talk about is this phony accounting system done by the Congressional Budget Office and by the Joint Tax Committee, and I am unwilling to let any of that determine my thoughts on this. This will raise revenues dramatically because we will get higher growth … This is going to raise revenues a lot just the way it did with Reagan.”

BARTIROMO: “By the way, I’ve got a JP Morgan report right in front of me saying, they’re telling clients earnings are going to be up 8-9% on top of a strong earnings curve we’ve ever seen, as a result of this tax plan, and that’s in 2018… well, that’s why this market is up $6 million. That’s right.”

Study Shows JCT Underestimates Senate’s Tax Cuts & Jobs Act in Latest Projection

Estimates recently released by JCT projected that the Senate tax bill, “which includes $1.4 trillion in net tax cuts over a decade, would make up for … less than a third of its cost, through economic growth,” the analysis said. “That means the net cost of the bill would be about $1 trillion over a decade.”

However, a Quantria/Inforum(UMD) study using a more measured approach to interest rate prediction found the Senate plan would increase economic growth further than JCT projected, adding about $1 trillion in additional revenues with a deficit of $500 billion over ten years.

“The Joint Committee on Taxation was off by nearly half a trillion dollars when projecting revenues from the Bush tax cuts,” said Freedom Partners Executive Vice President James Davis. “It’s embarrassing that Republicans in the Senate are suddenly clinging to the findings of a half-finished analysis, based on flawed assumptions, delivered by a group with a historic track record of failure,” he added.

Understanding the Limitations of the Models

According to Warren Payne, former policy director and chief economist for the House Ways & Means Committee, understanding the shortfalls of modeling methods is key to making sound decisions on tax reform.

To help support his position, Payne cited the Tax Reform Act of 2014 put forward by then-chairman of the Ways and Means Committee Dave Camp (R-MI). In scoring the legislation, JCT used two models and a range of assumptions to estimate that it would increase the rate of economic growth by between 0.1-1.6 percent, with an average of about 0.5 percent.

“Six of those estimates came from the JCT’s MEG (Macroeconomic Equilibrium Growth) model and two came from JCT’s OLG (Overlapping Generations) model. Understanding the limitations of these models is key because the limitations likely resulted in the models underestimating the increase in economic growth.

“For example, the MEG model assumes that a dollar of federal spending has the same macroeconomic impact as a dollar of tax relief. We know that isn’t true: CBO says that private investment has a bigger impact on economic growth than public investment.

“Therefore, the model underestimated the economic benefits of private sector investment. Further, the MEG model requires assumptions about how labor responds to changes in tax rates. In prior analysis, JCT always reported a median and low estimate of how labor responded to changes in tax rates.

In fact, the JCT advisory score of the 2014 Camp tax plan estimated growth spanning an enormous spread from 0.1 to 1.6 percent growth.

JCT “examined the proposal under a number of scenarios and found that, depending on which assumptions were used, the plan would boost the economy anywhere from 0.1 percent to 1.6 percent. For lawmakers, that would have translated into $50 billion to $700 billion in essentially free revenue,” POLITICO reported.

“‘If you’ve got an estimate’ that is 16 times the other, then ‘I don’t know what kind of answer you have,’ said Jane Gravelle, a longtime tax economist at the nonpartisan Congressional Research Service.”

Only Modest Additional Economic Growth Needed to Offset Deficit

Even using its static models that don’t capture additional growth, the Congressional Budget Office estimates that every 0.1% increase in Gross Domestic Product adds about $270 billion in federal revenue over 10 years. That means a mere four years at 3% growth—the U.S. historical norm—could fill a $1 trillion hole.

History Proves Bold Tax Relief Powers Economic Growth

History proves that tax reform, which lowers rates and creates a simpler, fairer and flatter tax code, will benefit all Americans. Tax cuts under presidents Kennedy, Reagan and Bush resulted in strong economic growth, billions of dollars more in federal revenue, thousands of dollars more in disposable income and millions more jobs Americans deserve.

Specifically, when tax rates are reduced, particularly taxes on work, savings and investment, the economy responds positively. During the five-year period following each of the highlighted tax cuts, average quarterly GDP grew:

  • Kennedy cuts of 1964 (5.2%)
  • Reagan cuts of 1981 & 1983 (5%)
  • Bush cuts of 2003 (3%)

With tax and regulatory reform, the Trump administration has said it hopes to achieve 3 percent growth. The numbers above suggest that target would be well within reach.

WSJ: It’s Up to Republicans to Deliver on Tax Reform for a Stronger Economy

JCT is not alone in its undervaluation economic growth and revenue under tax reform. According The Wall Street Journal, there’s reason to be wary of “inherently speculative” CBO estimates that have “typically underestimated” the economic growth and revenue returns from tax cuts. 

“Republicans need to decide if they still believe America can prosper again, or if it is doomed to the slow growth and stagnant wages of the last 11 years,” The Journal warned.