Trump Campaign’s “Dynamic Scoring” of Revised Tax Plan Should Be Taken With More Than a Grain of Salt
Relies on Assumptions Well Outside Economic Mainstream
End Notes
[1] Lynley Browning, “Trump to Tout Tax Plan’s Growth Benefits Amid Questions of Cost,” Bloomberg Politics, September 15, 2016, http://www.bloomberg.com/politics/articles/2016-09-15/trump-to-tout-tax-plan-s-growth-benefits-amid-questions-of-cost.
[2] Isaac Shapiro, “The Trump Tax Plan and National Priorities,” Center on Budget and Policy Priorities, June 1, 2016, https://www.cbpp.org/research/federal-tax/the-trump-tax-plan-and-national-priorities and Tax Policy Center, “Analysis of Donald Trump’s Tax Plan,” December 22, 2015, http://www.taxpolicycenter.org/publications/analysis-donald-trumps-tax-plan.
[3] The Tax Foundation’s estimate of the original Trump tax plan showed a large revenue loss even though the estimate included dynamic scoring effects. The new Trump plan includes (along with other changes) tax cuts like those in the House Republican tax plan released in June that under the Tax Foundation’s model generate the largest boosts to the economy and revenues. See Mark Gimein, “So…Where’s the Trump Tax Plan?” Money, July 18, 2016, http://time.com/money/4400318/trump-tax-plan-stephen-moore/.
[4] Conventional Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO) estimates of the fiscal impacts of legislation, which do not include macroeconomic effects, are often incorrectly labeled “static,” implying that they do not take into account any behavioral responses to tax changes. In reality, these estimates incorporate many behavioral responses, such as expected changes in the timing of capital gains realizations and in the form of compensation that some taxpayers receive (e.g., changes in the proportion of wages versus non-wage benefits).
[5] Kyle Pomerleau, “Details and Analysis of the 2016 House Republican Tax Reform Plan,” Tax Foundation, June 5, 2016, http://taxfoundation.org/article/details-and-analysis-2016-house-republican-tax-reform-plan.
[6] The Tax Policy Center is releasing its estimate of the cost of the House Republican plan tomorrow, but official estimates are not available. The Citizens for Tax Justice estimate does not include a dynamic scoring component. Citizens for Tax Justice, “Ryan Tax Plan Reserves Most Tax Cuts for Top 1 percent, Costs $4 Trillion Over 10 Years,” June 29, 2016, http://ctj.org/ctjreports/2016/06/ryan_tax_plan_reserves_most_tax_cuts_for_top_1_percent_costs_4_trillion_over_10_years.php.
[7] See Douglas W. Elmendorf, “Dynamic Scoring: Why and How to Include Macroeconomic Effects in Budget Estimates for Legislative Proposals,” Brookings Papers on Economic Activity, Fall 2015, https://www.brookings.edu/wp-content/uploads/2015/09/ElmendorfTextFall15BPEA.pdf; and Paul N. Van de Water and Chye-Ching Huang, “House ‘Dynamic Scoring’ Rule Likely Will Mean More Tax Cuts – Not More Information,” Center on Budget and Policy Priorities, January 5, 2015, https://www.cbpp.org/research/house-dynamic-scoring-rule-likely-will-mean-more-tax-cuts-not-more-information.
[8] This discussion focuses on results from CBO and JCT, using the CBO and JCT models most similar to the Tax Foundation model, as discussed below.
[9] See Alan Cole, “Economic and Budgetary Effects of Permanent Bonus Expensing,” Tax Foundation, September 16, 2015, http://taxfoundation.org/article/economic-and-budgetary-effects-permanent-bonus-expensing.) A subsequent 2016 Tax Foundation estimate of the cost of making bonus depreciation permanent concluded that dynamic effects would pay for a much more modest 6 percent of the cost over the first ten years. (Tax Foundation, “Options for Reforming America’s Tax Code,” June 6, 2016, http://taxfoundation.org/sites/taxfoundation.org/files/docs/TF_Options_for_Reforming_Americas_Tax_Code.pdf, p.76.) The difference likely reflects in part the temporary extension of bonus depreciation for five years at the end of 2015, when it was previously scheduled to expire. (Thus, if JCT were to re-estimate the macroeconomic effect of making bonus depreciation permanent, it would very likely find an even smaller effect than it did in 2015.) Other factors may also be at play; for example, the Tax Foundation has alluded to changes to its assumptions about how quickly the economy adjusts to tax changes and depreciation regime transitions. See Tax Foundation, “March 2016 Taxes and Growth Model Update,” http://taxfoundation.org/article/march-2016-taxes-and-growth-model-update.
[10] Joint Committee on Taxation, “A Report To The Congressional Budget Office Of The Macroeconomic Effects Of H.R. 2510, ‘Bonus Depreciation Modified And Made Permanent,’ As Ordered To Be Reported By The House Committee On Ways And Means,” October 27, 2015, https://www.jct.gov/publications.html?func=startdown&id=4844.
[11] Congressional Budget Office, “A Macroeconomic Analysis of the President’s 2016 Budget,” August 21, 2015, https://www.cbo.gov/publication/50734.
[12] Stephen J. Entin, “A Dynamic Analysis of President Obama’s Tax Initiatives,” Tax Foundation, March 3, 2015, http://taxfoundation.org/article/dynamic-analysis-president-obama-s-tax-initiatives. The Tax Foundation has not conducted an analysis of the President’s fiscal year 2017 budget. In analyzing the 2016 budget, the Tax Foundation modeled two scenarios with differing assumptions about the corporate rate reform the budget proposed; both generated large revenue increases before counting estimated macroeconomic effects, and revenue losses after counting them.
[13] CBO estimated that in 2025, the budget’s immigration reform proposal would raise revenues by an additional $85 billion and the proposed one-time repatriation tax would reduce revenues an additional $7 billion.
Counting macroeconomic effects, the budget’s spending and tax proposals (apart from immigration reform) would increase outlays in 2025 by $46 billion and raise revenues by $58 billion, thereby reducing the deficit by $12 billion, CBO estimated. CBO did not specify how much of each of these effects was attributable to the budget’s spending proposals. It’s implausible, however, that CBO credits the budget’s spending proposals for large dynamic revenue increases that mask large dynamic revenue losses caused by the tax proposals. CBO has noted that the budget’s proposed investments (such as in higher education) take some time to affect labor force productivity and therefore would have a “limited effect” on productivity during the ten-year budget window and would “probably reduce potential output slightly over the ten-year period” as some people left the labor force to complete school (though they would be more productive when they rejoined it). See Congressional Budget Office, “The Macroeconomic and Budgetary Effects of Federal Investment,” June 16, 2016, https://www.cbo.gov/publication/51628. It is therefore not plausible that the budget’s spending proposals have large positive revenue effects.
CBO’s assessment of the budget did not incorporate any macroeconomic effects of the budget’s corporate tax changes. The Tax Foundation did make estimates of such effects, contending they would reduce GDP. See Stephen J. Entin, “A Dynamic Analysis of President Obama’s Tax Initiatives,” http://taxfoundation.org/article/dynamic-analysis-president-obama-s-tax-initiatives. But this difference cannot fully explain the large gap between the CBO and Tax Foundation estimates of the budget’s effect on the economy (and associated revenue feedback). CBO’s analysis of the macroeconomic effects of the President’s fiscal year 2017 budget appears to include the effects of its corporate tax reform proposals, which are largely the same as the proposals in the fiscal year 2016 budget. And CBO’s estimate of the overall macroeconomic effect of the President’s 2017 budget over the last five years of the ten-year budget window is similar to its estimate for the 2016 budget, with a central estimate of an increase in GNP of 1.8 percent. See Table 3 in Congressional Budget Office, “A Macroeconomic Analysis of the President’s 2017 Budget,” https://www.cbo.gov/publication/51625.
[14] Tax Foundation, “Options for Reforming America’s Tax Code,” June 6, 2016, p. 96, http://taxfoundation.org/sites/taxfoundation.org/files/docs/TF_Options_for_Reforming_Americas_Tax_Code.pdf.
[15] CBO, “A Macroeconomic Analysis of the President’s 2017 Budget,” June 2016, p. 9, https://www.cbo.gov/publication/51625.
[16] Tax Foundation, “Options for Reforming America’s Tax Code,” June 6, 2016, pp. 69-71, http://taxfoundation.org/sites/taxfoundation.org/files/docs/TF_Options_for_Reforming_Americas_Tax_Code.pdf.
[17] See Table 2 in Nicholas Bull, Tim Dowd, and Pamela Moomau, “Corporate Tax Reform: A Macroeconomic Perspective,” National Tax Journal, Vol. 64 No. 4, December 2011, http://www.ntanet.org/NTJ/64/4/ntj-v64n04p923-41-corporate-tax-reform-macroeconomic.pdf.
[18] Tax Foundation, “Options for Reforming America’s Tax Code,” June 6, 2016, pp. 69-71, http://taxfoundation.org/sites/taxfoundation.org/files/docs/TF_Options_for_Reforming_Americas_Tax_Code.pdf.
[19] See Table 15 in Joint Committee on Taxation, “Macroeconomic Analysis of Various Proposals to Provide $500 Billion in Tax Relief,” March 1, 2005, p. 44, https://www.jct.gov/publications.html?func=startdown&id=1189.
[20] Ibid., p.44.
[21] See Table 21 in ibid., p. 50.
[22] Tax Foundation, “Overview of the Tax Foundation’s Taxes and Growth Model,” http://taxfoundation.org/overview-tax-foundation-s-taxes-and-growth-model and Tax Foundation, “The Tax Foundation Small Comparative Statics Model of the U.S. Economy,” http://taxfoundation.org/tax-foundation-small-comparative-statics-model-us-economy.
[23] In CBO’s case, the Solow Growth Model (see https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/presentation/50730-dynamicscoringedelberg.pdf) and in JCT’s the Macroeconomic Growth Model (MEG) (see https://www.jct.gov/publications.html?func=startdown&id=4807, section III).
[24] The Tax Foundation assumption here is at the upper end of the range that CBO and JCT would consider plausible based on the empirical evidence. Congressional Budget Office, “The Long-Run Effects of Federal Budget Deficits on National Saving and Private Domestic Investment,” Working Paper 2014-02, February 28, 2014, https://www.cbo.gov/publication/45140.
[25] CBO and JCT have performed dynamic analyses with a variety of models, but the models referred to here are the ones most in line with empirical estimates of supply-side responses. Jane G. Gravelle, “Dynamic Scoring for Tax Legislation: A Review of Models,” Congressional Research Service, January 24, 2014, p. 17, http://graphics8.nytimes.com/packages/pdf/business/20140204_dynamic_scoring_report.pdf.
[26] The Tax Foundation describes its model as an “open-economy model that is driven by changes in the cost of labor and the cost of capital” in which “the long-run real after-tax return to physical capital is virtually constant.” That last assumption, the organization states, “implies that capital is highly responsive to its return.” See “The Tax Foundation Small Comparative Statics Model of the U.S. Economy,” http://taxfoundation.org/tax-foundation-small-comparative-statics-model-us-economy.
[27] Tax cuts that raise the after-tax return on capital encourage firms to invest more, but two things normally limit that expansion. The first is diminishing returns: the after-tax rate of return on new investment falls as the capital stock gets larger to the point where further investment doesn’t cover the cost of attracting funds. Second, the cost of attracting funds will rise if people require a higher rate of return to supply those funds or have a fixed savings target. The Tax Foundation model recognizes the first effect but assumes away the second.
[28] Congressional Budget Office, “The 2016 Long-Term Budget Outlook,” July 2016, p. 66, https://www.cbo.gov/publication/51580. For a review of the empirical literature on which CBO bases these assumptions, see Congressional Budget Office, “The Long-Run Effects of Federal Budget Deficits on National Saving and Private Domestic Investment,” Working Paper 2014-02, February 28, 2014, https://www.cbo.gov/publication/45140.
[29] CBO, “The 2016 Long-Term Budget Outlook,” July 12, 2016, p. 65-66, https://www.cbo.gov/publication/51580.
[30] GDP or GNP can be measured either by the value of final sales of goods and services or by the value of the incomes earned (wages, profits, interest, etc.) in the production of those goods and services.
[31] Congressional Budget Office, “The 2016 Long-Term Budget Outlook,” p. 19, https://www.cbo.gov/publication/51580.
[32] See Congressional Budget Office, “The Long-Run Effects of Federal Budget Deficits on National Saving and Private Domestic Investment,” Working Paper 2014-02, February 28, 2014, https://www.cbo.gov/publication/45140.
[33] William G. Gale and Andrew A. Samwick, “Effects of Income Tax Changes in Economic Growth,” February 2016, http://www.brookings.edu/~/media/research/files/papers/2014/09/09-effects-income-tax-changes-economic-growth-gale-samwick/09_effects_income_tax_changes_economic_growth_gale_samwick_.pdf.
[34] Office of Tax Analysis, Treasury Department, “A Dynamic Analysis of Permanent Extension of the President’s Tax Relief,” July 25, 2006, https://www.treasury.gov/resource-center/tax-policy/Documents/Report-Dynamic-Analysis-2006.pdf. For further discussion of the Treasury analysis, see Jason Furman, “Treasury Dynamic Scoring Analysis Refutes Claims By supporters of the Tax Cuts,” Center on Budget and Policy Priorities, August 24, 2006, https://www.cbpp.org/research/treasury-dynamic-scoring-analysis-refutes-claims-by-supporters-of-the-tax-cuts.
[35] Chuck Marr and Chye-Ching Huang, “Raising Today’s Low Capital Gains Tax Rates Could Promote Economic Efficiency and Fairness, While Helping Reduce Deficits,” Center on Budget and Policy Priorities, September 19, 2012, https://www.cbpp.org/research/raising-todays-low-capital-gains-tax-rates-could-promote-economic-efficiency-and-fairness.
[36] Len Burman, “Capital Gains Tax Rates and Economic Growth (or not),” Forbes, March 15, 2012, http://www.forbes.com/sites/leonardburman/2012/03/15/capital-gains-tax-rates-and-economic-growth-or-not/#775dcc972a42.
[37] Tax Foundation, “Options for Reforming America’s Tax Code,” June 6, 2016, http://taxfoundation.org/sites/taxfoundation.org/files/docs/TF_Options_for_Reforming_Americas_Tax_Code.pdf.
[39] Tax Foundation, “Options for Reforming America’s Tax Code,” June 6, 2016, p. 6, http://taxfoundation.org/sites/taxfoundation.org/files/docs/TF_Options_for_Reforming_Americas_Tax_Code.pdf.