House Ways and Means Committee Chairman Dave Camp, R-Mich., says that “independent, nonpartisan analysts say [his new tax reform] plan could increase the size of our economy by $3.4 trillion – that’s equivalent to 20 percent of today’s economy.” Impressive if true, but a closer look at what they actually say pops that balloon.
First, some background. The experts to whom Camp refers – at the nonpartisan Congressional Joint Committee on Taxation – estimate how tax legislation affects federal government revenues. The committee does not try to estimate how changes in tax policy affect the size of the economy as measured by gross domestic product, and hence does not include in its official estimate any “dynamic feedback” effects on revenues due to changes in GDP.
There are sound reasons why the committee (as well as the Congressional Budget Office and the Treasury Department’s Office of Tax Analysis) take this approach to budget scoring: The macroeconomic effects are highly uncertain, and the resulting budget estimates will inevitably be controversial and subject to political manipulation. Nevertheless, tax-cut advocates have long imagined that “dynamic scoring” would show substantially lower revenue losses from tax cuts than conventional estimates do. Accordingly, they’ve pressed for dynamic analyses to accompany official estimates.
Camp designed his tax reform proposal to achieve a revenue neutral official score. In other words, measures that reduce revenues are offset by measures that increase revenues so that, over the next 10 years, the legislation neither increases nor decreases cumulative deficits. But he has also requested and received a supplemental macroeconomic analysis from the committee.
That analysis well illustrates the uncertainty that’s inevitable in estimates from such analyses. Camp’s cherry-picking of the results illustrates the potential for political manipulation.
There is no settled methodology for conducting a macroeconomic analysis of tax legislation. The joint committee uses two distinct economic models and several different assumptions about how tax changes affect household and business decisions about how much to work, save and invest. The result is eight separate estimates of the macroeconomic and revenue effects of the Camp plan.
In a nutshell, the committee estimates that the economy will be 0.1 percent to 1.6 percent larger in 2023 than it is now and 2014-2023 revenues will be $50 billion to $700 billion higher. In today’s dollars, the boost to growth would be $25 billion to $400 billion in 2023 –nowhere near Chairman Camp’s $3.4 trillion.
So where do his numbers come from? Apparently from comparing 2014-2023 cumulative GDP unadjusted for inflation under current law and under the Camp plan, using the committee’s largest estimate of the macroeconomic effects of the proposal. From a revenue estimating standpoint, there’s a certain logic to looking at the cumulative difference in nominal (unadjusted for inflation) GDP, since 10-year revenue estimates are reported in nominal dollars and the cumulative change in nominal GDP is a key determinant of how the proposal would affect revenue.
But, it’s just wrong to imply that, after accounting for growth that would occur anyway under current law, the economy in 2023 will be an additional 20 percent larger than it is today, when the joint committee’s largest estimate is that it will be just 1.6 percent larger.
Even the 1.6 percent estimate is questionable. It’s generated by a theoretically elegant economic model that makes highly unrealistic assumptions about how businesses and households actually behave in the real world. Arguably, an estimate in the lower part of JCT’s range is far likelier. The smaller estimates of economic growth and revenue gains are generated by a pragmatic policy model whose results are more consistent with the empirical evidence on work, saving, and investment responses to tax changes.
Although my colleagues at the Center on Budget and Policy Priorities and I find important problems with the Camp proposal – it likely means larger deficits after the first 10 years and it hits many working families hard – the chairman deserves praise for his serious effort to grapple with tax reform. But, he shouldn’t claim that it will produce a supply-side economic miracle.