Tax Cuts Stymied By 'Secretive' Budget Calculations, Says Congressman

By Christine Hall | July 7, 2008 | 8:28 PM EDT

( - Would-be tax cutters have long fumed over an influential but little known method used by congressional number crunchers to predict how much a tax cut plan will short-change the federal treasury.

Tax cut bills regularly meet an untimely death once the joint committee on taxation completes those calculations, which are branded by the anti-tax cut crowd as evidence that a tax cut is too big and expensive. But those calculations are based on certain economic assumptions, which can make all the difference.

This week, Republicans on the House Ways and Means Committee began looking at ways to change those economic assumptions.

"It effects whether or not tax cuts go forward and what sort of tax cuts and tax policies get enacted," said Chris Edwards, director of fiscal policy studies for the Cato Institute. Edwards meets regularly with like-minded Washington, D.C. economists to devise a better system of economic modeling for tax cuts, with hopes that Congress will someday adopt it.

Mainly, Edwards wants the joint tax committee to take into account the economic growth that results from tax cuts. He also wants the committee to disclose to the public how it actually arrives at its numbers.

An example of the current problem is capital gains, says Edwards. "If capital gains tax rates are cut, people will realize a lot more capital gains [and] there will be more stock market trading activity" resulting in greater investment and growth. "That will offset some of the revenue loss of a cut."

When President Bush proposed a $1.6 trillion tax cut over ten years, economists like Harvard's Martin Feldstein said it would not really cost the government $1.6 trillion but around $1 trillion because of the revenue growth, Edwards said.

"But if the joint tax committee scores these things as losing a lot of money, it creates a hurdle for pro-growth tax cuts," Edwards continued. Tax cut opponents can then say "look, it's going to lose this much money; it's fiscally irresponsible, etc., etc."

Openness is another priority for reformers. "Because of the importance of your predictions in forming tax policy, it is also important that the methods behind them be publicly disclosed to the fullest extent possible," said Amo Houghton (R-N.Y.), Ways and Means subcommittee chairman.

"Now it's sort of a secretive process where the joint tax committee has a black box and no one knows exactly what goes on inside it," Edwards elaborated.

"When a congressman requests a particular tax cut [to be scored], whether it's a corporate one like depreciation or a capital gains one for individuals, he sends a letter to the joint committee and the joint committee does their analysis and sends them back a letter saying, 'here's ... the answer'... without telling them how they came about it.

"They just want to hand down the answers like Moses and not have anyone question them," said Edwards.

But reformers will have their work cut out for them.

Congressional Budget Office director Daniel Crippen dealt a blow to their cause by recently criticizing the idea of moving from a "static" system of scoring to the "dynamic scoring" favored by supply side economists like Edwards.

Crippen recently told the House budget committee, the "CBO does not believe that dynamic scoring by it and [the Joint Committee on Taxation] would improve the analysis provided to the Congress."

While the current system may have its shortcomings, "integrating dynamic scoring into cost estimates would pose intractable problems," he said.

For one thing, Crippen suggested, analysts would have too much discretion to make assumptions about how a new tax policy would influence future policy decisions, such as how Congress would make up for any revenue shortfall.

Placing analysts in such a position "would drive results and undermine their credibility," said Crippen.

The proposed reforms might also create an unwanted problem for tax cutters.

If macroeconomic effects must be factored into tax cut proposals, "it can be argued that a similar approach is necessary with respect to spending proposals," said Lindy Paull, chief of staff of the Joint Committee on Taxation.

That's a cause of concern for advocates of small government, said Edwards, who fear that the big government types could say "if the government spends $100 million more, then that will benefit the economy by $150 million. We can go out and build more bridges [which will] really stimulate the economy."

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