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Willisms

« Quotational Therapy: Part 132 -- Ronald Reagan. | WILLisms.com | Trivia Tidbit Of The Day: Part 434 -- Texas Needs School Choice. »

Trivia Tidbit Of The Day: Part 433 -- JCT & CBO Projections.

Very Wrong, Very Often-

You have have heard or read about the recent controversy involving the Congressional Research Service (CRS). Basically, the CRS, now that the Republicans are no longer in charge, will no longer track earmarks/pork passing through Congress. Pretty shady business, there.

But the CRS is not the only taxpayer-funded organization to play politics with research and analysis. Other essentially in-house government think-tanks have some 'splaining to do, when it comes to their faulty projections, slanted assumptions, and often worthless analysis.

The track record of both the Congressional Budget Office and Joint Committee on Taxation are terrible:

...Congress cut the capital gains tax rate from 20 percent to 15 percent in 2003. The JCT estimated that this would cause a revenue loss of $5.4 billion from 2003 to 2006.

But capital gains revenues instead rose by $133 billion during those years. As Dan Clifton of the American Shareholders Association says, "There is no excuse for this $138 billion error."

The CBO made similarly wild errors. It projected capital gains tax revenues for the period from 2003 to 2006 to be $197 billion with the 2003 tax rate cut. But the actual capital gains revenues for that period were $330 billion, reflecting an error of 68 percent.

First, a visual of the JCT's 138 billion dollar error, with regard to Capital Gains tax relief:

jctprojectionsvsresults.gif

Next, the CBO's 68% error:

cboprojectionvsresults.gif

And that's just the Capital Gains tax relief.

More:

JCT and CBO made the same estimating errors for the 1997 capital gains rate cut, underestimating capital gains tax revenue by $217 billion in the first two years after the cut alone. But, inexcusably, the two agencies learned absolutely zero from the 1997 experience and went ahead with similarly ridiculous projections for the 2003 rate cuts.

The CBO also has recently made large errors in estimating total federal revenues. For 2004-2006, CBO underestimated federal revenues by an average of $85 billion a year, or a total of $255 billion over that three-year period. This has resulted in similarly large errors in estimating the budget deficits year after year.

These errors resulted because CBO refused to accurately estimate the effects of President Bush's tax cuts during those years. While the tax cuts were projected to lose $382.6 billion during those years, higher economic growth resulting from the cuts produced $196 billion in unestimated additional revenue. So the net revenue loss from the tax cuts was only $186.6 billion, less than half the official estimate.

These errors are not random. They are consistently biased against tax cuts, grossly overestimating the revenue loss. We have voluminous experience now with the positive economic effects of tax cuts producing a revenue feedback that sharply reduces the expected revenue loss, going back at least to the Kennedy tax cuts in the early 1960s. JCT and CBO need to draw on that experience to produce more accurate estimates.

But it is not only tax cuts that are wildly misestimated. We see similarly wild errors in spending estimates. CBO estimated that the average premium for seniors for private sector coverage under the Medicare Part D prescription drug plan would be $38 per month. But in the first year it was $24, and this year it will be $22, reflecting a 72 percent error. The cost to the government for this program is now projected to be $136 billion less for 2007 to 2013 than CBO estimated when the legislation was passed, an error of 26 percent.

Lots of errors on display here, typically due to a lack of dynamic analysis of the effects of tax policies, and a lack of understanding of pro-growth policies. Sure, on a static balance sheet, cutting taxes will reduce revenue, especially in the short run. But reducing tax rates also propels economic growth, narrowing the expected revenue gap. Over the long haul, though, lower taxes (and the economic conditions created by them) produce higher levels of tax revenues than higher taxes.

Unfortunately, Congress relies heavily on CBO and JCT projections to make its decisions; even some Republicans in Congress sometimes reject proposed free market reforms because they would be "too costly" according to the CRS, CBO, and JCT. The Washington press corps also relies on these official governmental publications to frame their articles on a variety of policy topics.

Whether it's tax policy, Social Security, health care, education, or just about anything else, our government's official analysts seem to consistently spin the numbers in a partisan/ideological fashion, hurting free market conservative Republican proposals in the process. Maybe they are doing it on purpose, or maybe they are just incompetent. Either way, it's bad.

While trying to abolish these acronym-heavy government organizations, or even replace their personnel (pretending for a moment that conservatives control Congress), would be fodder for the latest media-driven non-scandal, fitting perfectly into the narrative about Republicans firing civil servants with which they disagree, something really must happen to change the way these groups project consequences of policy proposals.

In a global economy increasingly reliant on information, we just deserve better from our "official" think-tanks.


-------------------------------------

Previous Trivia Tidbit: A Little Less Tax Freedom This Year.

Posted by Will Franklin · 2 April 2007 06:06 PM

Comments

These kinds of errors are nothing new. The same shenanigans occurred when Reagan cut tax rates too. Whether it is an ideological problem or simple lack of imagination, a failure of education, I don't know. But I don't expect it to change. Too many in power have too much invested in high tax rates.

Posted by: Tom Bri at April 2, 2007 10:01 PM

Thanks for the graphs, Will! I'm constantly amazed that an institution that is tasked with coming up with accurate numbers to be used in making policy can be THIS wrong THIS often on this subject.

If this were subcontracted out to a Corporation like Halliburton, there would be Congressional Investigations, Tribunals, Indictments... the full circus.

Providing, of course, the numbers went against the Left. Going agains the Free Market Conservatives makes it all fair game.

Posted by: Mr. Michael at April 2, 2007 10:12 PM

Will,

I think that part of this is because companies had massive incentives to repatriate money from overseas subsidiaries to take advantage of the new tax rates and subsequently, many companies declared dividends that had not done so in the past to take advantage of the short term (which is set to expire) tax laws.

The bigger issue is that in order for the economy to grow consistently and the capital markets to make long term investments, we need tax law CONSISTENCY and long term security of tax rates. Whenever there is a loophole or short term change, people jump and that is actually bad for the economy in the long run.

Take for instance the 100% immediate depreciation allowance in 2004 for vehicles over 6k lbs. That sent every business owner and their dog out to buy big SUVs and take the depreciation credit. So short term, car dealers and auto manufacturers saw a huge spike in production requests, profits, and demand, but this immediately went away on January 1.

The tax cuts expiring is going to create the same kind of rush to pay dividends and take profits before the change which will result in less capital available for expansion of business causing a slowdown in consumer and business spending which will have a long run negative effect, not to mention the fact that receipts will immediately fall because the higher tax rates are, the harder people fight to avoid them--especially the educated wealthy folks.

Posted by: Justin B at April 3, 2007 03:22 PM

"Kind of a big error." Heh.

Posted by: Assistant Village Idiot at April 3, 2007 10:09 PM