Estimating The Budgetary Impact - Washington Insider
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Estimating The Budgetary Impact


Article Date: 08-01-2005
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

Should reforming the Joint Committee on Taxation be at the top of the pro-growth agenda?

It's late 2004. The depreciation bonus expires at the end of the year. To claim the bonus, an equipment purchaser has to acquire the product and put it in service by December 31. But equipment is in short supply. AED fears inventory shortages will undermine the ability of customers to take advantage of the stimulus law before it expires. So the association proposes to Congress that the "acquisition" and "placed in service" dates in the depreciation bonus be extended to March 31, 2005. AED's proposal gains traction on the Hill. As conference negotiations on the foreign sales corporation (FSC) tax bill enter their final phase, a senior member of the House GOP leadership urges that the AED provision be included. Victory is close.

Then the provision hits a pothole: Congress' Joint Committee on Taxation (JCT), which is responsible for estimating the budgetary impact of tax proposals, announces AED's proposal will cost the federal budget $1 billion per month, the same as extending the depreciation bonus outright.

To AED and our allies the estimate sounds outrageous, but for lawmakers bound to work with those numbers and trying to keep the FSC bill revenue neutral, it's just too expensive. Our proposal winds up on the cutting room floor.

It's a story repeated all too often in Washington: A member of Congress proposes a pro-growth tax law change, JCT says it will be too costly, and a good idea is abandoned. Now, a new report authored by Daniel Clifton for the American Family Business Institute illustrates just how off-base JCT estimates often are.

According to Clifton's study, Learning from History: JCT's Static Score Cannot Determine the Real Revenue Effect of Repealing the Estate Tax, the biggest problem with JCT analytical methods is the failure to consider the macroeconomic feedback effects of tax cuts.

Reducing taxes on capital usually results in increased economic growth, investment, employment, and equity values that, in turn, result in higher tax revenues for the federal government.

According to Clifton, "Failing to consider these economic effects consistently results in JCT overestimating the cost of cutting taxes and provides an incomplete picture to elected officials of the consequences of their vote."

Clifton provides some compelling examples of where JCT has gotten it wrong. For the 2003 tax cut, JCT's failure to consider macroeconomic effects of the tax law changes resulted in a 32.3 percent overstatement of revenue losses.

JCT scored the first year cost of the 2004 American Jobs Creation Act at $4.5 billion. But, because the law contained a provision that allows companies to repatriate foreign earnings back into the United States at a lower tax rate, the law will actually result in a revenue gain of $16 billion.

JCT has also consistently flubbed estimates of the budgetary impact of capital gains tax cuts because it's failed to consider that they lower the cost of capital. Lower capital costs mean existing businesses are more likely to invest and undertake new projects. It also means entrepreneurs are more likely to start new companies and create new jobs.

By failing to see the big picture, JCT overestimated the cost of the capital gains tax cuts in 1997 and 1998 by $24 billion and overestimated the cost in 1999 by a whopping $36 billion.

AED's depreciation bonus adjustment bill may be a distant memory, but JCT's flawed scoring continues to impact other issues near and dear to the hearts of distributors, not the least of which is death tax repeal.

JCT refuses to consider that repealing the death tax would free up capital for additional investment, create an estimated 175,000 new jobs each year, and, quite likely, lead to a net increase in federal revenues.

As a result, JCT has scored permanent death tax repeal at $290 billion over 10 years. In the current budget climate, that's a lot of money and it's scaring off some senators (and giving too many others a convenient shield to hide behind).

The Clifton study makes one thing clear: It's time for members of Congress to start thinking much more critically about the numbers JCT gives them. It's also time for Congress to push harder to change the way JCT does business. And if it refuses to change, Congress should consider getting rid of JCT entirely and letting someone else do the job.

If you want a closer look, the Clifton report is available online at:

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Article Categories:  Public Policy  »  Taxes