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March 2, 2012
Dynamic Scoring: Will S&P Have Company?

Full Text Published by Tax Analysts®

By John L. Buckley

John L. Buckley is a visiting professor at Georgetown University Law Center and a member of Tax Analysts' board of directors. He would like to thank Monica Weaver Buckley for taking time from her studies to edit her father's work; Dallas Woodrum, a student at the law center, for research and writing assistance (Part V of the report is primarily his work product); and Jon Talisman, Joe Mikrut, and Michael Hauswirth for their technical comments on drafts of this report.

John L. Buckley Dynamic scoring involves the use of macroeconomic models to predict the economic response to changes in tax policy. To the extent the models predict growth, the additional revenue from that growth could be used to avoid some of the difficult political choices that tax reform would otherwise require. This report examines the models and assumptions underlying dynamic scoring analysis. Many of the assumptions bear little relationship to the realities of our complex economy. Others are judgment calls or pure speculations about future congressional actions, both of which would be susceptible to political pressures. Use of dynamic scoring could threaten the hard-won credibility of federal budget estimates with unpredictable, and most likely adverse, consequences in the financial markets.


Copyright 2012 John L. Buckley.
All rights reserved.



Table of Contents

I. Introduction

II. Concept of Dynamic Scoring

III. General Nature of Models


    A. Introduction to Models

    B. Results Governed by Assumptions


IV. Examples of Dynamic Scoring Experiments

    A. CBO Modeling of 10 Percent Rate Cut

    B. JCT Analysis


V. Results of 30 Years of Tax Legislation

VI. Conclusions


    A. Perception of 'Cooking the Books' Inevitable

    B. Models Do Not Reflect Today's Economy

I. Introduction

Over the last two years, there has been a resurgence of debate on reform of the federal tax system. In 2010 the National Commission on Fiscal Responsibility and Reform (the Bowles-Simpson Commission) suggested that tax reform could both raise substantial additional revenue for deficit reduction and substantially reduce tax rates. Its report included an illustrative plan with a top individual tax rate of 28 percent. The plan was promoted by the so-called Gang of Six in the Senate during the debate leading up to last summer's debt limit debacle. But the plan was never translated into a detailed legislative proposal, nor was it scored by the Joint Committee on Taxation.

House Ways and Means Committee Chair Dave Camp, R-Mich., early last year announced his intention to develop a tax reform plan that would reduce the top individual and corporate income tax rates to 25 percent. On October 26, 2011, he released a discussion draft that reaffirmed his goal of reaching that 25 percent top rate.1 The discussion draft contains some options for revising the international tax rules, but it does not include any details on how he proposes to offset the cost of the general rate reductions. A JCT analysis demonstrates the difficulty of achieving a 25 percent top corporate rate.2 It suggests that eliminating most major tax expenditures benefiting corporations would permit a reduction of the top corporate rate to 28 percent on a revenue-neutral basis.3 The analysis overstates the rate reduction that could be financed by repeal of corporate tax expenditures, because it assumes no transition relief and it includes repeal of politically sacrosanct benefits such as the ability to deduct currently (that is, expense) research and development expenditures.

The lack of detailed legislative proposals for tax reform is due to the combination of several factors:


    1. The expectations for dramatic rate reductions were based on unrealistic estimates of the revenue that could be raised from the reform of tax expenditures.4 Nothing is more damaging for the prospects of legislation than unrealistic expectations at the outset of the legislative debate.

    2. A 1986-style tax reform along the lines envisioned by Camp or the Bowles-Simpson Commission would require significant rollback or repeal of long-standing tax benefits, including the mortgage interest deduction and the exclusion of employer-provided health insurance. On the business side, it would require repeal of benefits such as the manufacturing deduction, accelerated depreciation, and the research credit. Changes to those benefits could have adverse economic consequences and political repercussions.

    3. A revenue-neutral reduction of the top corporate income tax rate to 25 percent cannot be achieved merely by repealing corporate tax expenditures. It would require the reversal of long-standing tax benefits that are not considered tax expenditures, such as the deduction for interest expense or advertising expenses. Large partnerships or S corporations are also at risk of being taxed as corporations.


A recent hearing indicates that the congressional proponents of tax reform with large marginal rate reductions are exploring dynamic scoring as a way to avoid these technical and political realities.5 Dynamic scoring involves the use of macroeconomic models to predict the economic response to changes in tax policy. If the models predict a positive macroeconomic response, the additional revenues from the predicted economic growth could be used to reduce the estimated budget cost of the tax reductions. This fiscal dividend could avoid some of the difficult political choices that comprehensive tax reform would otherwise require.

I am convinced that the use of dynamic scoring to determine the budgetary effects of tax legislation is a risky tactic. We have serious deficit problems, but the estimates of the costs of federal policy changes (whether effects on revenues or direct government spending) are accepted by the financial markets. The estimates are based on long-standing budget scorekeeping rules, and the Congressional Budget Office and JCT "have established substantial credibility as scoring agencies."6 If dynamic scoring is used to determine budget estimates, there is a risk that financial markets will no longer accept budget estimates on faith. Rather, they will examine the assumptions underlying the estimates. If those assumptions do not reflect the reality of today's economy or if there is even a perception of political interference in the budget scoring process,7 market analysts will question the accuracy of the estimates. The CBO and JCT may lose their hard-won credibility as scorekeepers. The use of dynamic scoring may lead other credit rating agencies to join Standard & Poor's in downgrading federal debt obligations.

In a recent article, Lee A. Sheppard quotes the argument made by Milton Friedman in support of the economic analysis underlying these macroeconomic models:


    A hypothesis is important if it "explains" much by little, that is, it abstracts the common and crucial elements from the mass of complex and detailed circumstances surrounding the phenomenon to be explained and permits valid predictions on the basis of them alone. To be important, therefore, a hypothesis must be deceptively false in its assumptions; it takes account of, and accounts for, none of the many other attendant circumstances, since its very success shows them to be irrelevant for the phenomenon to be explained.8

In this report, I will explain why Friedman's description of the assumptions in the macroeconomic models is accurate. The models are vastly oversimplified attempts to reflect our economy, omitting "many other attendant circumstances" that are part of a complex economy with worldwide flows of goods, services, and capital. The assumptions built into the models guarantee their success in predicting positive growth. Those assumptions often are deceptively false in that they actually bear little or no relationship to reality.9

I will look back at the last 30 years to judge whether Friedman's assertion of "success" can be supported by empirical evidence. The evidence is clear: Macroeconomic models have consistently overstated the impact, both positive and negative, of tax policy changes on the real world economy. But first, I will describe the concept of dynamic scoring and how it departs from current budget scoring conventions.


II. Concept of Dynamic Scoring

The CBO and JCT play important roles in determining the budgetary effects of changes to our tax laws. Every year, the CBO publishes its baseline forecast of federal expenditures and revenues for the 10-year budget window. That forecast is based on CBO assumptions about current policy and macroeconomic projections about the state of the economy. In the case of revenues, current policy is almost exclusively based on current law, with the assumption that temporary tax provisions actually will terminate as scheduled.10

The JCT is responsible for estimating the revenue effects of changes to tax law. Its revenue estimates start with the CBO baseline and reflect the estimated change in revenues from that baseline. The estimates are not purely static because they take into account behavioral responses to the change in law.11

Probably the most prominent examples of how behavioral responses affect revenue estimates are the estimates for changes in the capital gains tax rates. The JCT has always assumed that there would be large changes in the level of capital gain realizations in response to increases or decreases in the capital gains tax rates. "For instance, in response to the lower preferential rates on capital gains that were enacted in 2003, the Joint Committee staff assumed that there would be a relatively large short-term increase in realizations, followed by a somewhat smaller long-term increase. The additional revenues estimated resulting from this dynamic response in realization behavior offset roughly 70 percent" of what would have resulted from a purely static estimate.12

The JCT also assumes that there will be behavioral responses to changes in ordinary marginal tax rates. Those behavioral responses include timing shifts, shifts between taxable and nontaxable income, changes in choice of business organization, and compliance rates.13

However, the JCT is bound by the macroeconomic projections underlying the CBO baseline. As a result, its estimates assume that the policy change will not affect the overall size of the economy. Thus, the level of major economic variables like the gross national product, rate of inflation, interest rates, and the unemployment rate are also unchanged.14

Similar rules apply for determining the budgetary cost of changes in spending programs. In this case, the cost estimates are made by the CBO. Just like JCT revenue estimates, the CBO's cost estimates for changes in spending programs are governed by the macroeconomic assumptions underlying the baseline forecast.

If dynamic scoring were used for tax legislation, the JCT would first do a conventional revenue estimate of the legislation using the CBO baseline. Then either it or the CBO would predict the changes in the overall economy that could result from the legislation.15 Both institutions have done work on the dynamic scoring models that would be used, and one could easily anticipate a fight over turf. Arguably, the CBO might be the appropriate institution because it is responsible for the macroeconomic forecast that is part of the current budget process. However, the JCT has devoted a large amount of resources to developing dynamic scoring models for forecasting the macroeconomic effects of revenue proposals. There is little doubt that the chairs of the House and Senate revenue and budget committees would have different views concerning which of the two institutions should do the dynamic scoring analysis.16

The decision of which institution would do the dynamic scoring would be the first in a series of political decisions that would be required to implement dynamic scoring. There is no reason to expect that that decision would be based on an objective review of the capabilities of the two institutions. As discussed below, most dynamic scoring models do not work when the federal budget is on an unsustainable path. However, one of the dynamic scoring models developed by the JCT is capable of predicting positive economic growth from tax legislation even if that legislation does not address the current unsustainable federal budget. A Congress wishing to avoid the difficult decisions involved in deficit reduction may require use of this dynamic scoring model regardless of its economic merits.

Regardless of the outcome of the turf battle, the JCT would then adjust its conventional revenue estimate by taking into account the additional revenues resulting from the projected increase in economic growth. That adjusted estimate would be the official cost estimate for the legislation.

Dynamic scoring normally is discussed in the context of tax legislation. However, if dynamic scoring is used for tax legislation, there is an equally valid argument for using it for spending programs. It is likely that there would be a push to extend dynamic scoring to estimates of many spending programs as well.17 Clearly, there are macroeconomic benefits from many types of spending programs, such as education programs, basic research support, and infrastructure. Undoubtedly, there would be a range of estimates about the magnitude of those macroeconomic benefits, but that is no different from what exists concerning the macroeconomic benefits of tax policies.

The current budget rules already create incentives to convert spending programs into tax expenditures. Permitting dynamic scoring for tax legislation but not for spending programs "would create an even larger incentive to transform spending programs into tax incentives."18


III. General Nature of Models

A. Introduction to Models

It is difficult to describe the dynamic scoring models that likely would be used by the CBO or JCT. There is no consensus in the economic community on a single model, and there are many opinions on basic assumptions used in the models. There is one significant area of common agreement: Even with dynamic scoring, tax cuts do not pay for themselves.19 Their cost must be offset or they will reduce long-term economic growth. Assumptions on how Congress will choose to offset the costs dramatically affect the models' predictions. If Congress ultimately acts in a manner different from that assumed in the model, the model's predictions have little real-world relevance.

When doing dynamic scoring, the JCT presents multiple models "when analyzing tax proposals because no one model framework can provide complete information about the broad array of anticipated effects of tax policy on the economy."20 Similarly, the CBO acknowledges that there is "little consensus on exactly how tax cuts affect the economy."21 For that reason, the CBO uses several models, and it presents an array of projections based on different assumptions.22 "CBO does not believe that any single model can adequately explore the macroeconomic implications of fiscal policy: the best that analysis can do is to combine the separate insights that they can glean from different models."23

Dynamic scoring models are based on the principle that in the long term, the constraint on economic growth is the "size and quality of both the labor force and the stock of productive capital."24 Increasing those factors is assumed to result in greater economic growth.

If the tax legislation being scored results in a net reduction in receipts in the short term, the models can show short-term increases in growth based on increases in consumer demand. However, any long-term growth potential is based on supply-side principles. The models focus on how marginal rate reductions would increase the after-tax return from both labor and savings. Increasing the after-tax return is assumed to result in substitution effects.25 Individuals will substitute saving for consumption because of the higher after-tax return from savings. Similarly, because of the increased return for work, individuals will substitute more work for leisure, increasing the overall labor supply. The models only reflect "the effect of the tax cut on the quantity of hours of labor supplied (weighted by the productivity of those working)."26 The models ignore human capital and therefore do not take into account the negative effects of policy changes that would reduce incentives to invest in human capital, such as repeal of tax incentives for education benefits.27

"Empirical research on the significance of substitution effects shows that higher-income households are more responsive to changes in marginal tax rates than lower-income households."28 In this case, empirical research hardly seems necessary. Only upper-income individuals have the luxury of choosing leisure over work or significantly increasing their savings over consumption. As a result, the models predict greater increases in labor supply or savings if the marginal rate reductions focus on upper-income taxpayers. Because productivity of the additional labor supply is measured by income, bringing additional high-income workers into the labor supply creates the illusion that the overall productivity of labor is increased. Therefore, marginal tax reductions focused on the upper incomes will result in greater growth projections under the models than across-the-board reductions in marginal tax rates. Also, the models predict that increasing taxes on lower-income individuals to finance rate reductions at the top can result in positive growth projections. Lower-income individuals work out of economic necessity. Lowering their disposable income can create "additional incentives to work."29 According to the dynamic scoring models, a tax proposal would result in the greatest amount of economic growth if it increases tax rates on lower-income individuals and cuts tax rates on upper-income individuals.

B. Results Governed by Assumptions

All the dynamic scoring models used by the CBO or JCT are extraordinarily complex mathematical formulae.30 The projections produced by those models are completely dependent on the assumptions built into the formula. For example, according to JCT, "the way a model treats costs of labor and capital varies significantly across different types of models and can result in significant disparities in the results."

The assumptions I will discuss fall into three categories: (i) simplifying, counterfactual assumptions; (ii) assumed substitution effects; and (iii) speculative assumptions of future government actions.

1. Simplifying/counterfactual assumptions. It is not possible for a mathematical formula to accurately reflect our complex economy or human motivations for working or saving. Therefore, the models use simplifying assumptions that can be counterfactual in that they are contrary to observable facts.31 It is beyond the scope of this report to describe all those assumptions. Also, each of the dynamic scoring models used by the CBO and JCT has different sets of assumptions; I will focus only on the most significant ones.

a. No unemployment. All but one of the five models used by the CBO or JCT are based on the assumption that "supply equals demand in every period," meaning there is no such thing as involuntary unemployment or unused capital.32 The CBO states that assumption in more obscure terms: The models "do not contemplate disequilibrium."33 One of the JCT models acknowledges the possibility of temporary periods of unemployment, but it assumes that prices will adjust (that is, wage rates will fall) to bring supply and demand for labor into balance. The assumption of equilibrium of supply and demand is critical for projections of positive economic growth from tax policy changes designed to increase the supply of labor and capital. Increases in those factors can result in greater economic growth only in the case of an economy operating at full capacity.34 Otherwise, increases in labor supply and capital would only add to the current levels of unemployment and unused capital.

Clearly, that assumption is counterfactual in our current economy. Whether it is counterfactual over the long term will depend on whether we are experiencing a temporary period of cyclical unemployment or long-term structural employment challenges. If there are long-term structural problems, the growth projections will be wildly off the mark. But even worse, the projections will provide support for tax and budget policies that will be counterproductive.

b. Federal budget on sustainable path. There appears to be a consensus among economists that the government budget constraint must be satisfied "in any well-specified model."35 The government budget constraint means that the models cannot work when the federal budget is on an unsustainable path. Essentially, the well-specified models refuse to project positive economic benefits from legislative proposals that continue our current unsustainable fiscal policies.

To avoid that constraint, the analysts simply assume the problem is solved and that Congress will put the federal budget on a sustainable path by enacting a specific deficit reduction plan. For example, they assume that the tax legislation is accompanied by specific cuts in entitlement or other spending programs or by offsetting tax increases. The model's projections vary dramatically based on the assumptions used by the analyst to predict how Congress returns the federal budget to a sustainable path.

One of the models used by the JCT has the dubious distinction of being able to model "tax and government expenditure policy that may result in an unsustainable growth path."36 But one has to wonder about the relevance of a dynamic analysis based on a fiscal situation acknowledged to be unsustainable with negative economic consequences.

c. Foresight. Dynamic scoring is an attempt to measure the impact of tax legislation on economic growth. "However, this impact depends crucially on the overall foresightedness of U.S. households and firms."37 The term "foresightedness" is another of those obscure terms favored by economists. It refers to the ability to accurately predict future events, including future government fiscal and monetary policy, and act accordingly. Only one of the relevant models assumes that individuals are myopic -- that is, they cannot predict future events with accuracy. Other models assume different levels of clairvoyance. For reasons discussed below, assumptions about clairvoyance have a large impact on the projections from the various models.

d. Little or no analysis of impact on sectors. Tax reform legislation that has a sharp reduction in rates must also repeal or curtail long-standing tax benefits that apply to important sectors of our economy, including housing and healthcare.38 Clearly, there would be dislocations in those sectors. The dynamic scoring models offer little guidance as to whether those dislocations could adversely affect macroeconomic growth. Several of the JCT models have some analysis of the impact on housing, but the JCT acknowledges that that analysis is far from complete.39 Most models ignore sector effects on the assumption that the economy has only one production sector.

2. Possible effects become assumed facts. The most important assumptions in the dynamic scoring models involve the substitution effect -- the extent to which individuals will work or save more in response to reductions in marginal rates. The CBO and JCT publications on dynamic scoring both emphasize the importance of this effect on the predicted growth from marginal tax rate reductions. Reductions in marginal tax rates are assumed to result in a greater supply of labor because the higher after-tax return from labor will cause individuals to substitute work for leisure. Similarly, the higher after-tax returns are assumed to result in greater savings as individuals substitute savings for consumption. However, despite the assumptions in the model, the actual analysis is far more complex.

The actual effect of tax rate changes on savings depends on the relative strength of two offsetting factors. The first is the substitution effect. The second is called the income effect. The reduction in tax rates results in individuals receiving more income, which allows them to have lower levels of savings to finance their desired level of consumption in the future. Whether the reduction in tax rates will result in more or less saving "depends on whether the substitution effect is stronger or weaker than the income effect -- and that depends on people's preferences and can only be determined by empirical investigation."40

Several empirical studies have attempted to measure how changes in the after-tax return (including the changes in tax rates on capital) affect the net level of savings. A review of those studies led the CBO to conclude that no "researcher has made a compelling case that a significant net effect exists in either direction."41 Notwithstanding that empirical research, the CBO concluded "that a realistic chance remains that taxes on capital income affect savings."42

In the dynamic scoring models, that realistic chance becomes an assumed fact. But even among those who equate realistic chance with certainty, there is no consensus on the size of the impact on savings. There is a broad range of assumptions among economists and there is "little economic evidence to support any one of [the] broad range of possible assumptions."43

In effect, there are two levels of uncertainty surrounding the impact of taxes on savings. There is only a realistic chance that there is a significant impact, and there is a broad scope of opinion concerning its strength. All of that uncertainty is converted into a fixed assumption in the dynamic scoring models.

A similar balance of offsetting factors exists for the responsiveness of labor supply to tax rate reductions. There is the substitution effect assumed in dynamic scoring models, but there is also an income effect. Increasing the after-tax return means that individuals will need to work less to finance their desired level of consumption. Even if one believes that the substitution effect is stronger than the income effect, there is a broad range of estimates of the strength of the effect. Academic studies reach no consensus about the responsiveness of labor supply to changes in after-tax wages, reporting a wide range of estimates.44 Even proponents of dynamic scoring acknowledge the uncertainty.45 Again, uncertain estimates become fixed assumptions based on the subjective judgment of the modeler as to which one of the wide range of possibilities to select. Those are the types of subjective assumptions that could be highly susceptible to political intervention. Former CBO Director Rudolph Penner has summarized the problem: "Dynamic scoring would force analysts to make many more judgment calls than they do today. Quality control would be difficult, and that implies a high risk that ideological biases will pollute the analysis."46

3. Purely speculative assumptions. In its current revenue-estimating method, the JCT follows a long-standing scorekeeping convention by assuming fixed macroeconomic factors. That convention permits the making of revenue estimates "without predicting current or future actions of the Federal Reserve with respect to monetary policy or future actions of the Congress with respect to fiscal policy (changes in expenditures or taxes), both of which would affect macroeconomic aggregates, which would affect receipts."47

Dynamic scoring involves abandoning that convention and thus requires predictions about future Federal Reserve and congressional actions. Some dynamic scoring models have the counterfactual assumption that we have a closed economy without cross-border flows of goods, services, or capital. Those models avoid the need for predictions about how foreign central banks and governments will respond to the legislation being scored. Other models have more realistic assumptions that reflect in various degrees the worldwide economy that we have today. In those models, there also must be assumptions about the future actions of those foreign institutions.

There is a substantial question of how congressional staff could make assumptions about future U.S. or foreign government actions or even whether it would be appropriate. As a former JCT chief of staff has stated:


    In practice, however, macroeconomic analyses often are proffered as a way of mitigating the apparent cost of revenue-losing legislation. In such a case, the macroeconomic analysis depends critically on assumptions about how the tax cut will be paid for; that is, because tax cuts almost never completely "pay for themselves," a macroeconomic analysis must make an assumption about how any tax cut is financed: through borrowing? Through increased taxes elsewhere in the economy? Through reductions in entitlements? Through reductions in capital projects? Each financing assumption in turn significantly affects the macroeconomic outcome. How is the JCT staff equipped to determine which financing assumption is the correct one?48

The above focuses on the questions involved in the case of revenue-losing legislation. For reasons already discussed, those questions also exist when analyzing the impact of revenue-neutral legislation when the federal budget is on an unsustainable path. The government budget constraint requires the modeler to assume how and when Congress will act to put the federal budget on a sustainable path.

IV. Examples of Dynamic Scoring Experiments

I will examine two experiments in dynamic scoring that offer important insights on how the dynamic scoring models work. First, I will examine a CBO analysis of the effects of a 10 percent reduction in marginal individual tax rates. Second, I will consider a JCT analysis of the effects of a revenue-neutral tax reform proposal involving major reductions in marginal tax rates financed by the repeal of virtually all individual tax expenditures.

A. CBO Modeling of 10 Percent Rate Cut

In 2005 the CBO published a report analyzing the economic and budgetary effects of a 10 percent reduction in individual income tax rates.49 The proposal applied to ordinary income tax rates, the preferential rates for dividends and capital gains, and the rates in the individual alternative minimum tax. The analysis assumed no offsetting revenue increases or spending reductions for the first 10 years.

The CBO analysis makes the obvious point that tax cuts do not pay for themselves. Except when the government is running a surplus, tax cuts will reduce long-term economic growth unless their cost is offset by future tax increases or spending reductions. Therefore, the CBO analysis assumed that Congress would restore long-term budget stability after 10 years through tax increases or spending cuts.

The CBO report, like many others, emphasizes the potential of the supply-side effect of tax reductions to increase personal savings. It fails to clearly mention that the supply of capital available for private investment is measured by total national savings, not personal savings. Total national savings is the sum of personal savings and undistributed corporate earnings, plus or minus government surpluses or deficits. Because tax cuts do not pay for themselves, they will actually reduce capital supply because they increase the deficit. The CBO analysis grudgingly acknowledges this in a footnote, stating that their model assumes every dollar of tax cuts reduces capital investment by $0.36.50 The deficit increases will retard economic growth because of the reduction in the amount of capital available for private investment.

One of the critical assumptions in the CBO analysis is the "overall foresightedness of U.S. households and firms."51 Foresightedness means the ability to accurately predict future events (including congressional actions) and plan accordingly. The CBO suggests that "it is difficult to gauge . . . the extent to which that type of foresight influences people's decisions, the time horizon that people consider in making plans, and the future changes in policy they actually expect."52 Because of that inherent difficulty, the CBO used three different assumptions in its analysis concerning foresightedness. However, the CBO admits that the range of assumptions "does not span the possible effects of the tax cuts because people's behavior may differ from" its assumptions.53

The first assumption is that individuals are myopic -- an assumption that has some basis in fact: They respond only to current tax policy and cannot accurately predict what Congress may do 10 years from now. Using that assumption, the 10 percent reduction in rates would have a modest positive effect in the first five years because of its demand side effects. After the first five years, the proposal would result in projections of reduced economic growth because, given the lack of foresight assumed in this model, there are little or no supply-side effects from the tax cut.

The second assumption is that individuals have lifetime foresight -- they are able to accurately predict events during their entire lifetime and plan accordingly. Under that counterfactual assumption, much larger economic growth is projected for the first five years, slowing dramatically thereafter. There is a surprising explanation for the model's projection of increased economic growth. The expectation of future spending cuts or tax increases will encourage "people to work and save more in the meantime to prepare."54 It is not the positive effects of the tax cut that are projected to increase economic growth. Rather, it is the knowledge that the cuts are fiscally unsustainable and will be repaid with interest in the future that encourages greater work and savings in the meantime.

The third assumption is that individuals have unlimited foresight; this counterfactual assumption has individuals behaving "as if they have infinite lives."55 Under it, individuals will work much harder and save more because they and their descendants have to deal with the consequences of the offsetting revenue increases or spending cuts for an infinite period.

The model's projections also depend on the speculative assumption of what Congress will do 10 years in the future. The threat of a future tax increase will result in more work and savings in the meantime, as compared with the prospect of future spending cuts. Presumably, that is because individuals know they will face the tax increases, whereas they may think they can avoid the negative effects of the spending cuts.

B. JCT Analysis

In 2006 the JCT analyzed macroeconomic effects of a revenue-neutral proposal "to modify the individual income tax by broadening the tax base and reducing statutory tax rates."56 As described by the JCT, the proposal would repeal all personal exemptions, all itemized deductions, all credits other than the earned income tax credit, most above-the-line adjustments, and the exclusions for most employee fringe benefits (including employer-provided healthcare). The only major individual tax expenditures that would be retained are the preferential tax rates for capital gains and dividends, the EITC, and the retirement savings provisions. The proposal would result in a 27.8 percent top rate and a regressive redistribution of individual tax liability from high-wage earners to low-wage earners.57

The JCT asserted that it analyzed the proposal using three different macroeconomic models. That is not actually what they did. Only one of their models -- the macroeconomic equilibrium growth (MEG) model -- works when there are long-term federal deficits. The MEG model is the only one that actually analyzed the proposal described above. The other models assumed that the income tax proposal was accompanied by specified policies to restore budget stability. Those policies included cuts in entitlement programs and general government programs, or reversal of the rate reductions. The policy of reducing entitlement programs in those models resulted in the largest growth projections because it "induces more employment because the lower income group works more to make up for the loss of transfer payment income."58 Those models contain the comforting assumption for those low-income workers that there is no such thing as involuntary unemployment.

It is worth looking at the results of the MEG model since it is the only one that actually analyzed the income tax proposal described in the pamphlet. That model is slightly less counterfactual than the other two. It assumes an open economy, permits temporary periods of unemployment, and does not assume individuals can predict the future with certainty.

The MEG model showed greater growth in the short term than in the long term "because increasing government debt crowds out private sector investment."59 The amount of growth in the long term depended dramatically on which assumptions were used concerning the responsiveness of labor supply to changes in marginal tax rates. A surprising conclusion was that the proposal would result in a small reduction in total real capital (a measure of total national wealth) in the short term and a substantial reduction in the long term. The reduction in total capital was the result of a large reduction in the value of residential housing, offset in part by a significant increase in non-housing capital.60

The growth predicted by the MEG model is due to two features of the income tax proposal:


    1. The proposal is regressive. High-income individuals are assumed to be more responsive to changes in tax rates than lower-income individuals. Therefore, a downward shift of tax burden is assumed to result in larger labor supply and investment.

    2. The proposal repeals both the mortgage interest deduction and the deduction for real property taxes. Repeal of those benefits will result in a shift of investment from housing to non-housing sectors.


The JCT hedges the projections of positive economic growth with some cautionary remarks about the effects on housing prices:

    As housing prices adjust, there are potentially significant financial market effects that would likely be felt by both home owners and owners of capital, particularly if there are significant defaults. Neither model explicitly accounts for the effect of possible declines in housing prices on household wealth. . . . Since for many consumers the value of their house is the single largest item in household wealth, any reduction in the value of the house would diminish wealth, which could potentially lower consumption.61

The JCT analysis makes clear that the only possible housing price adjustment under the proposal is a reduction in prices. The MEG model predicts a reduction in real residential capital of approximately 7 percent in the first 10 years and approximately 20 percent in the long term. Part of that reduction may be the result of fewer new homes being built. But new home construction is small compared with the existing housing stock.62 The bulk of the reduction will come from reductions in the value of existing homes.

The potential effect of tax reform on housing prices is an example of the sharp disconnect between our real-world economy and dynamic scoring models. I do not believe that any financial analyst would see further declines in housing prices as positive for the economy. But the assumption that repeal of current housing tax benefits will cause lower investment in housing, largely because of lower housing prices, is one of the major reasons why the dynamic scoring models show positive growth from tax reform.

The income tax proposal would have a dramatic impact on the healthcare sector, which accounts for approximately 15 percent of our overall economy. The proposal repeals the income tax exclusion for employer-provided health insurance and the deduction for healthcare expenses of individuals. The JCT has acknowledged that the proposal would increase the after-tax cost of healthcare and is likely "to decrease consumption of healthcare."63 But there was no analysis of the impact of those changes on either the healthcare sector or the insurance industry.


V. Results of 30 Years of Tax Legislation

Rather than merely examining the CBO and JCT case studies, we also can look at the results of real-life experiments in tax rate changes. At one time, economists could rightly complain "of the difficulty of studying the economic impact of tax legislation in a world where the tax system never changed."64 Congress has solved that problem. During the last 30 years, there have been a number of major tax policy changes enacted into law. Most of that legislation was based on the supply-side principles and notions of economic efficiency that are the foundation of the dynamic scoring models.

In 1980 the top individual marginal rate was 70 percent and the top effective capital gains rate was 28 percent. There were limited tax-deferred savings vehicles, and dividends were taxed as ordinary income subject to a top rate of 70 percent. Since 1980 there have been sharp reductions in tax rates and large expansions of tax-deferred savings vehicles. Those changes were enacted with the promise of increasing savings and labor supply.

The Economic Recovery Tax Act of 1981 cut individual tax rates by 23 percent over three years, with an immediate reduction in the top marginal rate from 70 to 50 percent.65 The Senate Finance Committee report recommending its enactment stated that the package would spur economic growth, business investment, and personal savings.66 Likewise, a report by the Joint Economic Committee stated that "marginal tax rate and spending reductions, when combined with reduced money growth will not only reduce inflation and nominal interest rates but will increase employment, real saving, real investment, and economic growth."67

Those predictions did not come true. The personal savings rate dropped from 11.3 percent in 1981 to 7.5 percent in 1986.68 The reduced marginal tax also had no discernible positive effects on labor supply or consumer demand. Martin Feldstein, chair of the Council of Economic Advisers for President Reagan, and CBO Director Douglas Elmendorf concluded that the economic recovery after 1981 was not a "result of a consumer boom financed by reductions in the personal income tax" and that there was "no support for the proposition that the recovery reflected an increase in the supply of labor induced by the reduction in personal taxes."69 Rather, they credited expansionary monetary policy as the "primary cause of increased output."70

The Tax Reform Act of 1986, which sought to simplify the tax code by lowering marginal tax rates and eliminating deductions,71 was also enacted with the hope of fostering an "efficient allocation of investment" and productivity gains in the long term.72 Those long-term economic improvements did not materialize. Summarizing the results of a conference on the economic effects of TRA 1986 sponsored by the University of Michigan, Brookings economist Henry Aaron said, "Most of the papers presented at this conference reinforced the casual observation that TRA '86 has had little effect on the broad measures of real economic activity in which most economists are interested."73 Personal savings rates continued to decline. Real gross private investments did not increase, remaining steady until dropping dramatically during the early-1990s recession.74 Consistent with the experience after the 1981 tax cuts, the economic effects of the 1986 tax reform failed to meet expectations.

In contrast to the 1981 and 1986 tax legislation, the Omnibus Budget Reconciliation Act of 1993 sought to decrease the federal deficit by increasing tax revenue and cutting spending. One of the revenue-raising provisions was the creation of two marginal tax brackets set at 36 and 39.6 percent for the top 1.2 percent of taxpayers.75 Republicans on the Ways and Means Committee, in their dissenting views to the bill, argued that among other negative economic effects, the new tax rates would "cause people to adjust their behavior by working less" and result in "little or no revenue for the federal government."76 Rep. John Kasich noted during the floor debate on the legislation that "virtually every major economic estimating firm in this country says that your bill is going to kill jobs."77 His observation was accurate, but the economic predictions by the firms he cited were not.

The civilian labor force participation rate reached its highest percentage on record during the Clinton administration: 67.3 percent in 2000.78 Tax revenue as a percentage of GDP increased, jumping from 17.5 to 18 percent in the year after enactment and reaching 20.6 percent in fiscal 2000, helping to foster a four-year period of budget surpluses.79 Contrary to what supply-side economists would predict, one of the strongest periods of economic growth in recent history occurred after the enactment of the 1993 tax increases.

Supply-side theory determined the direction of tax policy under President George W. Bush. He signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001, which cut marginal rates for all tax brackets other than the 15 percent rate bracket that applies to the largest number of individual taxpayers.80 The act was justified as necessary to prevent an economic downturn.81 Supply-side economists testifying before the Ways and Means Committee argued that lower marginal tax rates would have the added long-term effects of incentivizing people to work and stimulating savings and investment.82 Those expectations were not met. Not only did the economy enter a recession in 2001, but the personal savings rate reached its lowest point ever in 2005, at 1 percent.83 The labor force participation rate remained roughly the same after passage of the tax cuts and began to decline by the end of Bush's presidency.84

The second round of Bush tax cuts in 2003 was accompanied by similar predictions of enormous economic growth that never materialized. The Heritage Foundation predicted that the cuts would increase real GDP by $69 billion, jobs by 844,000, disposable income for a family of four by $1,653, and investment by an average of $57 billion per year between fiscal 2004 and fiscal 2014.85 None of those predictions proved accurate.

The economic data alone cannot prove that a particular bill failed to meet expectations because it is impossible to know what would have happened if that bill had not been enacted. However, the cumulative economic data of the last 30 years suggest that the 30-year experiment with tax policy guided by supply-side principles has failed. One cannot find in the economic data for the last 30 years any evidence that supply-side-based tax policy has delivered its promised benefits.

In theory, the large reductions in marginal tax rates and expansion of tax incentives for savings should have resulted in greater savings by individuals. The reverse occurred. During the last 30 years, there has been a steady decline in the personal savings rate from 11.3 percent in 1981 to 2 percent in 2007 before the recession.86 The steady decline has been marked by upward, albeit temporary, spikes in the personal savings rate, but those spikes generally have been associated with periods of economic decline.

Net national savings is a measure of the total amount of domestic capital available for private investment. As discussed above, personal savings is only one component of net national savings. The impact of the tax cuts on net national savings is clear: They reduced the amount of capital available to the private sector. Net national savings fell after the enactment of the 2001 tax cuts and even became negative one year. In contrast, net national savings as a percent of gross national income more than doubled following the 1993 tax increase, from 2.7 percent of gross national income in 1993 to 6.5 percent in 1999.87

Under standard economic theory, the sharp declines in marginal tax rates over the last 30 years should have increased labor supply. The civilian labor force participation rate did increase from 63.9 percent in 1981 to 67.1 percent in 2000, before a steady decline after the enactment of the 2001 tax reduction.88 However, all the increase in the civil labor force participation rate occurred among women. The rate actually declined for men during that period, dropping from 77 percent in 1981 to 73 percent in 2008.89 The reason for the increase in women's labor force participation rates over the last 30 years seems clear: an increase in both the number and quality of job opportunities available to women attributable to elimination of barriers. The decline in labor force participation since 2001 suggests that the amount and quality of job opportunities has a far greater impact on the size of the labor force than marginal tax rates.


VI. Conclusions

A. Perception of 'Cooking the Books' Inevitable

Virtually every article on dynamic scoring acknowledges one fact: "The task of dynamic scoring is formidable, because there is little agreement about how best to model long-run economic growth and the effect of taxes on the economy."90 As noted above, the JCT has declared that "no one model framework can provide complete information about the broad array of anticipated effects of tax policy on the economy."91 The CBO has acknowledged that "the best that analysis can do is to combine the separate insights that they can glean from different models."92 Unfortunately for budgetary purposes, you need a single number, not several separate insights.

There is little objective evidence to guide the CBO or JCT in deciding on a single model or single set of assumptions. Further, some of the assumptions involve predicting future actions by Congress and the Federal Reserve, and such predictions simply are not appropriate matters for congressional staff.

There is truly only one way to resolve those issues as suggested by Douglas Holtz-Eakin in his testimony before the Ways and Means Committee: "The Committee will need to settle on a single way of conducting its dynamic scoring."93 It actually would be more complex than what he suggested. I doubt that one committee would have the prerogative of deciding on the model and assumptions. But he is correct in the thrust of his remarks. The choice of model and critical assumptions will be decided directly or indirectly by politicians.

Members of Congress would not have to crudely intervene in the scorekeeping process. Many of the assumptions involved in dynamic scoring are purely subjective with little objective evidence in support of picking a specific assumption from a wide range of assumptions supported in academic literature. Under those circumstances, it would be difficult for congressional staff to justify choices inconsistent with the desires of the majority party.94 That two scorekeeping institutions could be competing for the privilege of conducting the dynamic scoring also creates pressure for making estimates consistent with the majority's desire. The simple choice of a chief of staff for the CBO or the JCT who has a record of analysis could enable lawmakers to guarantee the results of dynamic scoring.

The perception, if not the reality, of political interference in budget scorekeeping would be inevitable. The repercussions in the financial markets cannot be predicted, but there is no positive outcome possible if the JCT and CBO budgetary estimates lose credibility. In 1995 congressional testimony, former Federal Reserve Chair Alan Greenspan offered the following caution:


    We must avoid resting key legislative decisions on controversial estimates of revenues and outlays. Should financial markets lose confidence in the integrity of our budget scoring procedures, the rise in inflation premiums and interest rates could more than offset any statistical difference between so-called static and more dynamic scoring.95

This report focuses on the use of dynamic scoring based on supply-side principles to minimize the costs of tax reductions. But prevailing economic theories change and dynamic scoring could be based on different economic theories. There is evidence that countries grow more rapidly when incomes are more equal.96 That clearly has been the experience here. Under those theories, dynamic scoring could be used to project greater economic growth from a redistribution of the tax burden to upper-income individuals.

B. Models Do Not Reflect Today's Economy

The experience of the last 30 years has demonstrated that the dynamic scoring models failed to accurately predict the macroeconomic effects of changes in tax laws. That should not be surprising because they reflect an economic philosophy developed when our economy was far different than it is today.

The dynamic scoring models are variants of the neoclassical growth model that assumes that the long-term constraint on economic growth is supply of labor and capital. "The neoclassical growth model, first introduced by [Frank Ramsey in 1928], is the most widely taught model of capital accumulation and long-run growth and is the workhorse of modern growth theory."97 There might have been some real-world relevance to those models in the 1920s and maybe even in the 1970s, when they replaced Keynesian economics as the prevailing school of economic thought. With a relatively closed economy and little unemployment, the total production of U.S. firms perhaps was constrained by the total supply of domestic labor and capital. That is no longer the case.

As noted in a recent article by Sandile Hlatshwayo and Nobel Laureate economist Michael Spence, the "global economy has an abundance of human resources and they are becoming more accessible as time goes on."98 Those resources are becoming more accessible because multinationals have become adept at creating and managing global supply chains, and they are getting better all the time. According to Spence, "the transactions costs of complex and geographically diverse supply chains are coming down because of a combination of management expertise and information technology that allows efficient coordination of complex, geographically dispersed systems."99

Spence concludes that "the evolution of the U.S. economy supports the notion of there being a long-term structural challenge with respect to the quality and quantity of employment opportunities in the United States."100 The dynamic scoring models offer no insights on how to respond to that challenge. They simply assume that that challenge does not exist.


FOOTNOTES

1 For the draft proposal, see Doc 2011-22576 or 2011 TNT 208-27. For Camp's technical explanation of the proposal, see Doc 2011-22550 or 2011 TNT 208-28.

2 Doc 2011-23034, 2011 TNT 213-12.

3 The analysis only took into account tax expenditures benefiting domestic operations because Camp announced that the changes to international tax rules would be revenue neutral.

4 For a more detailed discussion, see John L. Buckley, "Tax Expenditure Reform: Some Common Misconceptions," Tax Notes, July 18, 2011, p. 255, Doc 2011-13056, or 2011 TNT 138-6.

5 See Camp's announcement of the September 21, 2011, hearing on economic models available to the JCT for analyzing tax reform proposals (Sept. 14, 2011), Doc 2011-19543, 2011 TNT 179-56.

6 Peter Orszag, "Macroeconomic Implications of Federal Budget Proposals and the Scoring Process," Testimony Before the Subcommittee on Legislative and Budget Process, House Rules Committee (May 2, 2002), at 6, Doc 2002-10918, 2002 TNT 86-70.

7 That dynamic scoring has become a part of the Republican response to President Obama's deficit reduction and job creation packages would suggest that the perception of political interference in budget estimates is inevitable. See, e.g., Senate Finance Committee release, "Finance Committee Republicans Submit Recommendations to Deficit Reduction Committee" (Oct. 14, 2011), available at http://finance.senate.gov/newsroom/ranking/release/?id=b37acc47-927d-4aae-a7ec-0fdce102d850 (recommending that the supercommittee adopt a direction to the JCT requiring the use of dynamic scoring).

8 Lee A. Sheppard, "Should We Adopt a Millionaire's Surtax?" Tax Notes, Oct. 17, 2011, p. 307, Doc 2011-21721, 2011 TNT 200-1 (quoting Milton Friedman, "The Methodology of Positive Economics").

9 I vacillate in my choice of which assumption is the most deceptively false. One choice is the assumption used in some models that individuals have perfect foresight -- that is, they can predict the future with total accuracy and plan accordingly. The other is the assumption that individuals "behave as if they had infinite lives." See Robert Dennis et al., "Macroeconomic Analysis of a 10 Percent Cut in Income Tax Rates," CBO Technical Paper (May 2004), at 7.

10 Some excise taxes dedicated to trust funds, like the gasoline tax and the taxes on air transportation, have termination dates. For scoring purposes, the CBO and JCT ignore those terminations and the corresponding terminations of the spending programs being funded by the dedicated excise tax.

11 See JCT, "Summary of Economic Models and Estimating Practices of the Staff of the Joint Committee on Taxation," JCX-46-11 (Sept. 19, 2011), at 3, Doc 2011-19863, 2011 TNT 182-19 ("Some commentators mistakenly refer to conventional revenue estimates reported by the Joint Committee staff for budget reporting purposes as 'static estimates,' implying that the estimates assume that taxpayers do not alter their economic decisions in response to changes in tax policy. This implication is incorrect. The Joint Committee staff has long modeled taxpayer behavior as part of each conventional estimate reported by the Joint Committee staff"). By contrast, the tax expenditure estimates published annually by the JCT are static and do not account for behavioral changes. Actual revenue estimates of eliminating tax expenditures often can be substantially smaller than what the estimated annual cost of the expenditure would suggest.

12 Id.

13 Id.

14 Id. at 2.

15 The scale of the analysis required for dynamic scoring may conflict with the need for "quick and timely scoring information." Douglas Holtz-Eakin, "Economic Models Available for Analyzing Tax Reform Proposals," Testimony Before the Ways and Means Committee (Sept. 21, 2011), at 4, Doc 2011-20056, 2011 TNT 184-41.

16 The JCT is chaired on a rotating basis by the two chairs of the congressional revenue committees, and they select the chief of staff. "The CBO director is selected under informal practices in which the House and Senate Budget Committees alternate in recommending a nominee to the Speaker and President pro tempore of the Senate [and] the Speaker and President pro tempore have adhered to the Budget Committees' recommendations in making past selections." Megan Suzanne Lynch, "Congressional Budget Office: Appointment and Tenure of the Director and Deputy Director," Congressional Research Service (Oct. 18, 2005), at 2.

17 In my opinion, a bipartisan majority of the congressional committees responsible for public works would insist on its use for infrastructure programs.

18 Orszag testimony, supra note 6, at 3.

19 Economic Report of the President (Feb. 2003), at 57-58; N. Gregory Mankiw, Principles of Economics 29-30 (1998) (arguing there is "no credible evidence" that tax revenues "rise in the face of lower tax rates").

20 JCT, "Macroeconomic Analysis of a Proposal to Broaden the Individual Income Tax and Lower Individual Tax Rates," JCX-53-06 (2006), at 7, Doc 2006-25014, 2006 TNT 241-22.

21 CBO, "Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates" (Dec. 1, 2005), at 1 (CBO Issue Brief).

22 Id.

23 CBO Technical Paper, supra note 9, at 3.

24 CBO Issue Brief, supra note 21, at 2.

25 See the discussion below on why analysis is more complicated than mere focus on substitution effects.

26 CBO Technical Paper, supra note 9, at 3.

27 JCX-53-06, supra note 20, at 8.

28 Diane Lim Rogers, "Why Cutting Taxes to Help the Economy Isn't So Easy," Tax Notes, July 18, 2011, p. 301, Doc 2011-15122, 2011 TNT 137-10.

29 JCX-53-06, supra note 20, at 10.

30 The dynamic scoring models are complex, but they "are still in some ways much simpler than the Keynesian models." CBO Technical Paper, supra note 9, at 6 (providing further discussion on this topic).

31 See JCX-46-11, supra note 11, at 14. Economists tend to use terms that obscure their common meaning. "Counterfactual" is one of those terms.

32 JCX-53-06, supra note 20, at 5.

33 CBO Technical Paper, supra note 9, at 6.

34 For a more detailed discussion of this issue, see Rogers, supra note 28.

35 Mankiw and Matthew Weinzierl, "Dynamic Scoring: A Back-of-the Envelope Guide," National Bureau of Economic Research Working Paper No. 11000 (Dec. 2004), at 4; see also Holtz-Eakin testimony, supra note 15, at 4-5.

36 JCX-53-06, supra note 20, at 5.

37 Holtz-Eakin Testimony, supra note 15, at 4.

38 For a cautionary warning on the impact of removing longstanding benefits, see Jonathan Talisman, "How Did We Get Here? Changes in the Law and Tax Environment Since the Tax Reform Act of 1986," Testimony Before the Senate Finance Committee (Mar. 1, 2011), Doc 2011-4316, 2011 TNT 41-44.

39 JCX-53-06, supra note 20, at 7.

40 CBO, "Corporate Income Tax Rates: International Comparisons" (Nov. 2005), at 2, Doc 2005-23978, 2005 TNT 228-3 (CBO Corporate Rate Report).

41 Id.; see also JCT, "Federal Tax Treatment of Individuals," JCX-43-11 (2011), at 26, Doc 2011-19362, 2011 TNT 177-34 ("Substantial disagreement exists among economists as to the effect on saving of changes in the net return to saving. Empirical investigation of the responsiveness of personal saving to after-tax returns provides no conclusive results").

42 CBO Corporate Rate Report, supra note 40, at 2.

43 Alan J. Auerbach, "Dynamic Scoring: An Introduction to the Issues," 95 Am. Econ. Rev. 421, 422 (May 2005).

44 CBO, "The Effect of Tax Changes on Labor Supply in CBO's Microsimulation Tax Model," (Apr. 2007) at 7, Doc 2007-9504, 2007 TNT 72-18.

45 See Mankiw, supra note 19, at 10.

46 Rudolph Penner, "Dynamic Scoring: Not So Fast!" Urban Institute (Apr. 21, 2006), available at http://www.urban.org/publications/900946.html.

47 JCX-46-11, supra note 11, at 3.

48 Edward D. Kleinbard and Patrick Driessen, "A Revenue Estimate Case Study: The Repatriation Holiday Revisited," Tax Notes, Sept. 22, 2008, p. 1191, Doc 2008-19014, 2008 TNT 185-22, at n.14.

49 See CBO Technical Paper, supra note 9; see also CBO Issue Brief, supra note 21.

50 See CBO Issue Brief, supra note 21, at 4 and n.5.

51 Holtz-Eakin testimony, supra note 15, at 4.

52 CBO Issue Brief, supra note 21, at 3.

53 Id. at 4.

54 Id. at 5.

55 CBO Technical Paper, supra note 9, at 7.

56 JCX-53-06, supra note 20, at 1.

57 Id.

58 Id. at 14.

59 Id. at 10.

60 Id. at 11-12 (tables 3 and 5).

61 Id. at 7.

62 Today, there are 75 million units of owner-occupied housing, and new home construction is at depressed levels of less than 500,000 units annually.

63 JCX-53-06, supra note 20, at 8.

64 Joel Slemrod, "Income Creation or Income Shifting? Behavioral Responses to the Tax Reform Act of 1986," 85 Am. Econ. Rev. 175 (May 1995).

65 Economic Recovery Tax Act of 1981, P.L. 97-34.

66 S. Rep. No. 97-144, at 11-13 (1981).

67 JEC, "An Economic Analysis of the Reagan Program for Economic Recovery" (1981), at iii.

68 See Department of Commerce: Bureau of Economic Analysis, "Personal Savings Rate" (last visited Nov. 23, 2011), available at http://research.stlouisfed.org/fred2/series/PSAVERT (Commerce Savings Rate).

69 Martin Feldstein and Douglas Elmendorf, "Budget Deficits, Tax Incentives and Inflation: A Surprising Lesson From the 1983-1984 Recovery," 3 Tax Pol'y and the Econ. 21 (1989), available at http://www.nber.org/chapters/c10943.pdf.

70 Id.

71 See TRA 1986, P.L. 99-514.

72 S. Rep. No. 99-313 (1986), at 7.

73 Henry J. Aaron, "Lessons for Tax Reform," in Do Taxes Matter? 322 (1990).

74 See Department of Commerce: Bureau of Economic Analysis, "Real Gross Private Domestic Investment," available at http://research.stlouisfed.org/fred2/series/GPDIC96.

75 Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, section 13202.

76 H.R. Rep. No. 103-111 (1993), at 819 (the Republican members cited Feldstein to support their views).

77 Cong. Rec. H6249 (1993).

78 See Department of Labor: Bureau of Labor Statistics, "Labor Force Participation Rate," available at http://data.bls.gov/timeseries/LNS11300000 (Labor Force Participation Rate).

79 See CBO, "Revenues, Outlays, Deficits, Surpluses, and Debt Held by the Public, 1970 to 2009, in Billions of Dollars" (Jan. 2010), available at http://www.cbo.gov/ftpdocs/108xx/doc10871/HistoricalTables.pdf.

80 P.L. 107-16.

81 See statement of Treasury Secretary Paul O'Neill, "President's Tax Relief Proposals: Individual Income Tax Rates: Hearing Before the H. Comm. on Ways & Means," 107th Cong. 12.

82 Id. at 47 (Feldstein, testifying) and 62 (Kevin Hassett, testifying).

83 See Department of Commerce, supra note 68.

84 See Labor Force Participation Rate, supra note 78.

85 William W. Beach et al., "The Economics and Fiscal Effects of the President's Growth Package," Heritage Center for Data Analysis (2003), available at http://www.heritage.org/research/reports/2003/04/the-economic-and-fiscal-effects-of-the-presidents-growth-package.

86 Department of Commerce Savings Rate, supra note 68.

87 See "Economic Report of the President," H. Doc. 111-81 (Feb. 2010), at 369.

88 Id. at 377.

89 Id.

90 Mankiw and Weinzierl, supra note 35, at 2.

91 JCX-53-06, supra note 20, at 7.

92 CBO Technical Paper, supra note 9, at 3.

93 Holtz-Eakin testimony, supra note 15, at 5.

94 For extended discussion of this issue, see Orszag testimony, supra note 6, at 6.

95 Quote included in JCT, "Methodology and Issues in Revenue Estimating Process," JCX-2-95 (1995), at 25, Doc 95-1118, 95 TNT 15-15 .

96 See Nicholas Kristof, "America's Primal Scream," The New York Times, Oct. 15, 2011 (discussing arguments made in Robert H. Frank, The Darwin Economy (2011)).

97 Mankiw and Weinzierl, supra note 35, at 2.

98 Michael Spence and Sandile Hlatshwayo, "The Evolving Structure of the American Economy and the Employment Challenge," Council on Foreign Relations (Mar. 2011), at 33.

99 Id.

100 Id. at 1.


END OF FOOTNOTES

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