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Like a couple of baseball managers working the umpires before a big World Series game, Treasury Secretary Jack Lew and Representative Paul Ryan (R-WI), who wants to be the next chair of the House Ways & Means Committee, are looking to change the way Congress scores tax reform even before Congress begins a rewrite.
Ryan and Lew agree on one thing: They don’t like the way the Joint Committee on Taxation would score a big rewrite. Nothing new about that. Washington has a long tradition of whining about JCT (and the Congressional Budget Office).
But Ryan and Lew see totally different problems. It is as if Ryan is complaining his pitchers are not getting the low strike while Lew wants games to last 18 innings.
Ryan’s beef is that JCT does not include macroeconomic effects of tax rate cuts when it calculates their revenue costs. In other words, if a tax cut boosts the overall economy, that growth should be taken into account when JCT calculates how much that tax reduction adds to the deficit.
Republicans, who have been complaining about this for decades, call this dynamic scoring. And Ryan vows that if Republicans keep the House and take the Senate, they’ll order JCT to adopt this methodology.
Despite what some critics of the current system say, JCT does account for some behavioral responses to tax changes. Its estimates are not “static.” To wildly oversimplify, if Congress raises taxes on bananas, people are likely to buy fewer of them. And JCT recognizes that Treasury would collect less revenue than if banana consumption remained the same.
But JCT does not factor in changes in the overall economy. Mostly because it can’t.
It is important for lawmakers to understand how changes in tax law affect growth. But predicting these outcomes is extremely difficult, in part because they depend on factors that wouldn’t be specified in a reform bill. For instance, if a tax cut increases the deficit, how would that increased borrowing ultimately be repaid—by higher taxes or less spending? Who’d pay the new taxes? What spending would be cut? And when? The answers matter--a lot.
And even as Ryan demands JCT change its model, there is little evidence that tax code rewrites have ever produced measurable economic growth. In a recent paper and at a TPC program, Dartmouth College’s Andrew Samwick and my TPC colleague Bill Gale reviewed decades of research and found that individual income tax changes barely move the economic needle.
Business tax reform, especially if it is fully financed, could be more beneficial. Still, even if JCT is ordered to change the way it scores tax bills, Ryan may find himself disappointed in the results.
The debate is getting heated. Even such luminaries as Paul Krugman have weighed in (you can guess on which side). For a more dispassionate view, take a look at this brief paper by the University of California at Berkeley’s Alan Auerbach (a former deputy chief of staff at JCT).
TPC’s Donald Marron, who served as acting CBO director, has an interesting perspective on his experiences with dynamic scoring of some spending programs. And here is another take, from TPC’s Len Burman.
Lew’s complaint is very different. He worries because JCT only scores tax bills for 10 years and mostly ignores the effects after that. Congress and presidents long ago figured this out and now routinely play timing games to make fiscal outcomes seem rosy even when they break the bank outside the budget window. A classic: Creating incentives for people to shift retirement savings to Roth-style accounts that boost federal revenue in the short run but cost a bundle in future decades.
Speaking on Tuesday to The Peterson Institute for International Economics, Lew objected: “What I don't think is an acceptable outcome is to use the one-time savings to artificially lower the rates to an unsustainable level so that over the life of the new tax provisions, there's a loss of revenue."
If it happens all the time, why is Lew suddenly so concerned? Because he can imagine a GOP Congress writing a reform bill that appears to neither gain nor lose revenue over the first 10 years but that adds significantly to the deficit after that.
Congress and the White House grossly abuse this scoring convention. The problem is, what should JCT do about it? Score a rewrite over a 20-year budget window? Fine. Congress will just game that. Besides, the longer the window the less reliable the estimates will be.
With no prospect of the Washington Nationals in the World Series (Bitter? Me?), I can at least pop a beer and watch Lew and Ryan kick dirt and toss their caps over the way the umpires will call the game—long before their teams even take the field.
NOTE: A reader reminds us that JCT does do macroeconomic analysis of some tax legislation. House rules require that they do it "for any bill or joint resolution reported by the Committee on Ways and Means." However, JCT does not use that modeling to produce public revenue estimates. JCT uses two different macroeconomic models that can show big variations in long-term growth. For instance, JCT found that Dave Camp's tax reform could boost GDP by anywhere from 0.1 percent to 1.6 percent from 2014 to 2023. For more on JCT's methodology, click here.