[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                    ECONOMIC MODELS AVAILABLE TO THE 
                    JOINT COMMITTEE ON TAXATION FOR 
                     ANALYZING TAX REFORM PROPOSALS 

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 21, 2011

                               __________

                           Serial No. 112-116

                               __________

         Printed for the use of the Committee on Ways and Means


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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

WALLY HERGER, California             SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas                   CHARLES B. RANGEL, New York
KEVIN BRADY, Texas                   FORTNEY PETE STARK, California
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
GEOFF DAVIS, Kentucky                XAVIER BECERRA, California
DAVID G. REICHERT, Washington        LLOYD DOGGETT, Texas
CHARLES W. BOUSTANY, JR., Louisiana  MIKE THOMPSON, California
PETER J. ROSKAM, Illinois            JOHN B. LARSON, Connecticut
JIM GERLACH, Pennsylvania            EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   RON KIND, Wisconsin
VERN BUCHANAN, Florida               BILL PASCRELL, JR., New Jersey
ADRIAN SMITH, Nebraska               SHELLEY BERKLEY, Nevada
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas
ERIK PAULSEN, Minnesota
KENNY MARCHANT, Texas
RICK BERG, North Dakota
DIANE BLACK, Tennessee
TOM REED, New York

                       Jon Traub, Staff Director

                  Janice Mays, Minority Staff Director

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.




                            C O N T E N T S

                               __________

                                                                   Page

Advisory of September 21, 2011, announcing the hearing...........     2

                               WITNESSES

Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation..     6
Douglas Holtz-Eakin, President, American Action Forum............    32
John L. Buckley, Visiting Professor, Georgetown University Law 
  Center.........................................................    41
William W. Beach, Director, Center for Data Analysis, the 
  Heritage Foundation............................................    48

                       SUBMISSIONS FOR THE RECORD

Center for Fiscal Equity, statement..............................   112
Grover L. Porter, statement......................................   122
National Small Business Association, statement...................   123


                    ECONOMIC MODELS AVAILABLE TO THE
                    JOINT COMMITTEE ON TAXATION FOR
                     ANALYZING TAX REFORM PROPOSALS

                              ----------                              


                     WEDNESDAY, SEPTEMBER 21, 2011

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:06 a.m., in 
Room 1100, Longworth House Office Building, Hon. Dave Camp 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

Wednesday, September 21, 2011

                   Chairman Camp Announces Hearing on

                    Economic Models Available to the

                    Joint Committee on Taxation for

                     Analyzing Tax Reform Proposals

    Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and 
Means, today announced that the Committee will hold a hearing to review 
and examine the variety of economic models used by the Joint Committee 
on Taxation (JCT) to analyze and score tax reform legislation. In 
particular, the Committee will review the tools available to the JCT 
that would enable it to measure the effect of proposals on economic 
growth and job creation as well as the effect on revenue levels. The 
Committee last reviewed this topic at a hearing in 2002, so this 
hearing will not only examine changes in economic thinking and the 
Joint Committee's capabilities since then, but also review the extent 
to which the current economic climate poses new challenges to this 
analysis. The hearing will take place on Wednesday, September 21, 2011, 
in Room 1100 of the Longworth House Office Building, beginning at 10:00 
a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    JCT serves a critical role in the legislative process by providing 
expert and impartial analysis of the potential effect of proposals to 
change U.S. tax policy. Under current practice, the analytical methods 
used by JCT do not take into account the potential effects of statutory 
tax changes on economic growth. For most of the proposals analyzed by 
JCT, this practice is appropriate because the proposed changes would 
not be large enough to have a material impact on an economy as large as 
that of the United States. However, JCT has worked to develop the 
capacity to conduct macroeconomic modeling of significant changes to 
U.S. tax policy. Comprehensive tax reform by its very nature 
constitutes a significant change in U.S. tax policy and has the 
potential to significantly boost economic growth and job creation. The 
hearing will review the current status and capabilities of JCT's 
macroeconomic analysis and how it can be used to measure accurately the 
impact of comprehensive reform on economic growth and job creation.
      
    In announcing this hearing, Chairman Camp said, ``A wide array of 
economists and business leaders have testified before the Ways and 
Means Committee that comprehensive tax reform that lowers rates by 
broadening the tax base will promote economic growth and job creation. 
This hearing will examine the importance of ensuring that Congress can 
accurately measure the broad economic impact of comprehensive tax 
reform.''
      

FOCUS OF THE HEARING:

      
    The hearing will review JCT's revenue estimating methodologies and 
its ability to analyze the impact on economic growth and job creation 
of comprehensive tax reform proposals.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
written comments for the hearing record must follow the appropriate 
link on the hearing page of the Committee website and complete the 
informational forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``Hearings.'' Select the hearing for 
which you would like to submit, and click on the link entitled, ``Click 
here to provide a submission for the record.'' Once you have followed 
the online instructions, submit all requested information. ATTACH your 
submission as a Word document, in compliance with the formatting 
requirements listed below, by the close of business on Wednesday, 
October 5, 2011. Finally, please note that due to the change in House 
mail policy, the U.S. Capitol Police will refuse sealed-package 
deliveries to all House Office Buildings. For questions, or if you 
encounter technical problems, please call (202) 225-3625 or (202) 225-
2610.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
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record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
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written comments must conform to the guidelines listed below. Any 
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guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone, and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman CAMP. Good morning. Thank you for joining us for 
the latest in our continued series of hearings on comprehensive 
tax reform.
    Over the last several months, as we discussed the various 
facets and complexities associated with comprehensive tax 
reform, a wide array of economists and business leaders have 
testified before this Committee that comprehensive tax reform 
that lowers rates by broadening the tax base will promote 
economic health and job creation. But how much growth and how 
many jobs is what the American people want to know. Frankly, it 
is what I want to know, and I think most Members of Congress 
want to know as well.
    Before we can even determine if a tax reform package is 
worthy of consideration, let alone be called a success, it is 
critical to understand the true impact it will have on economic 
growth, Federal revenues, and, most importantly, job creation; 
and that brings us to the focus of the hearing today, both the 
capabilities and limitations of the Joint Committee on Taxation 
in estimating and analyzing comprehensive tax reform plans.
    JCT serves a critical role in the legislative process by 
providing expert and impartial analysis of potential revenue 
effects of proposals to change U.S. tax policy. However, under 
current practice, the analytical methods used by JCT do not 
typically take into account the potential effects of statutory 
tax changes on economic growth.
    For most of the proposals analyzed by JCT, this practice is 
appropriate, because the proposed changes would not be large 
enough to have a material impact on an economy as large as that 
of the United States. However, comprehensive tax reform, by its 
very nature, constitutes a significant change in U.S. tax 
policy and has the potential to significantly boost economic 
growth and job creation.
    JCT has developed a suite of macroeconomic models that can 
be used to estimate the impact of tax policy changes on 
economic growth. Today's hearing will help us better understand 
which policies and decisions are most relevant to promoting 
economic growth. As our economy continues to struggle, this 
additional analysis and research will serve an important role 
in helping this Committee make the hard decisions that are 
necessary to craft comprehensive tax reform.
    It is my hope that today's discussion will help to 
highlight how the work being done by the Joint Tax Committee 
will help us plan and develop solutions that create a Tax Code 
that works better for employers and families, instead of one 
that for far too long has worked against them.
    I thank the witnesses for being here today, and I yield to 
Ranking Member Levin for his opening statement.
    Mr. LEVIN. Thank you, Mr. Chairman. Welcome to all of you.
    This is a hearing on, and I quote, ``The economic models 
available to the Joint Committee on Taxation for analyzing tax 
reform proposals.''
    Let me first say that I hope that neither this hearing nor 
anything said here today is construed as a criticism of the 
Joint Committee, its work, or its staff. The dedicated team of 
economists, lawyers, and other professionals of the Joint 
Committee produce some of the very best economic analysis in 
the country and do so not in an academic or think-tank 
environment, but under the pressures and at the pace of the 
legislative process. This Committee could not function without 
them. I thank you, Mr. Barthold, and all your colleagues for 
your service.
    The debate over so-called dynamic scoring has been going on 
for years. During the Bush administration, the Republican 
majority and leadership--and we remember their statements very 
well--and Ways and Means Members on the then-majority side 
argued that the Bush tax cuts would pay for themselves and 
create millions of jobs. Whether guided by this notion of so-
called dynamic scoring or by none, the majority ruling this 
Committee never paid for anything. At the end of the Bush 
administration, we had a $1.5 deficit and an economy that was 
losing 700,000 jobs a month. There were other factors, but 
there was nothing dynamic about the fiscal irresponsibility of 
the then Republican majority.
    After reviewing today's testimony and grappling with all of 
its complexities, I urge that we not become embroiled in a 
theoretical debate at this particularly challenging time for 
our Nation's economy for two reasons.
    First, in addition to there being no evidence that tax cuts 
pay for themselves--quite the contrary--even most who sound 
some positive notes about so-called dynamic scoring acknowledge 
problems that make such an approach unworkable as we confront 
today's challenges. The reality is that there is simply no 
consensus in the economics profession about how businesses and 
individuals will respond to changes in policy, how foresighted 
they are in their decisionmaking, or on a host of other 
questions that would have to be answered to conduct a so-called 
dynamic analysis of tax legislation.
    Second, and most vitally, there is a crisis before us right 
now, before the Nation, and before the Committee; economic 
growth and jobs. The Committee, our Committee should be focused 
on jobs. The 14 million Americans who are looking for work need 
less theoretical discussion of estimating methodology and more 
practical action on job creation. One estimate, that of Mark 
Zandi, is that the President's proposed American Jobs Act would 
add 2 percentage points to GDP growth next year and 1.9 million 
jobs and cut the unemployment rate by a percentage point.
    The Committee Democrats have asked the chairman--you, Mr. 
Chairman--to hold hearings on the President's American Jobs 
Act. We have not received an answer, and we renew that request 
today.
    The President's proposal would jump-start our economy and 
create jobs for American workers. It would put more money in 
workers' pockets through a temporary payroll tax cut, saving 
the average family $1,500 a year. It would also keep over 6 
million workers from losing their unemployment benefits when 
they continue searching for work and provide new employers 
incentives to help get them hired.
    These proposals--these jobs and tax proposals are in the 
jurisdiction of this proud Committee. It is our responsibility 
to consider them, and I hope this Committee will meet that 
responsibility here and now.
    Thank you, Mr. Chairman.
    Chairman CAMP. Thank you, Mr. Levin.
    And, without objection, any other Member who wishes to have 
an opening statement included in the formal hearing record may 
submit one in writing.
    We are fortunate to have a panel of witnesses this morning 
with a wealth of experience. Let me briefly introduce them.
    First, I would like to welcome Tom Barthold, the chief of 
staff for the Joint Committee on Taxation. We thank you and 
your staff for your work and your efforts in preparing for 
today's hearing, and we look forward to your presentation.
    Second, we will hear from Doug Holtz-Eakin, who is 
currently serving as president of the American Action Forum. 
Mr. Holtz-Eakin formerly served as chief economist of the 
President's Council of Economic Advisors and later as director 
for the Congressional Budget Office.
    And, third, we will hear from John Buckley, who is well-
known to this Committee, who is a visiting professor at the 
Georgetown University Law Center. Mr. Buckley formerly served 
on the staffs of both the Committee on Ways and Means and the 
Joint Committee on Taxation.
    And, finally, we will hear from William Beach, the director 
of the Heritage Foundation, Center for Data Analysis. Mr. Beach 
has been instrumental in developing the economic modeling 
capacity at the Heritage Foundation.
    Thank you all again for being with us today. The Committee 
has received each of your written statements, and they will be 
made part of the formal hearing record.
    Mr. Barthold you will be recognized for 10 minutes in order 
to adequately explain JCT's current modeling practices. Our 
other three witnesses will be given the customary 5 minutes to 
summarize their written testimony.
    Mr. Barthold, you are recognized for 10 minutes. Welcome.

    STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, JOINT 
                     COMMITTEE ON TAXATION

    Mr. BARTHOLD. Thank you very much, Chairman Camp and Mr. 
Levin. It is always a pleasure to be before this Committee.
    Today, I will be describing for you the economic modeling 
that the Joint Committee staff uses to estimate the effects of 
Federal revenues from changes in tax policy as well as to 
provide supplemental economic information for the Members' 
consideration.
    To make it clear I think perhaps the place to start is to 
ask the simple question of what is a revenue estimate. A 
revenue estimate is an estimate of the change in projected 
Federal baseline receipts that would result from a change in 
law.
    Now the reference point for a revenue estimate prepared by 
the Joint Committee staff is the Congressional Budget Office's 
10-year projection of Federal receipts, which is referred to as 
the receipts baseline. The receipts baseline assumes that 
present law remains unchanged during the 10-year period and 
thus asks what receipts will accrue to the Federal Treasury 
over the next 10-year period absent any statutory changes.
    A common misunderstanding that arises when we report 
revenue estimates to policymakers is that we are sometimes 
presenting a receipts forecast. Generally, when the economy is 
growing, the Congressional Budget Office forecasts that 
baseline receipts are growing. So when the Joint Committee 
staff reports a revenue estimate with a negative in front of it 
that does not mean that the Joint Committee staff is predicting 
that receipts will fall, but rather that baseline receipts will 
generally grow more slowly if the proposal is enacted than they 
are projected to grow under present law in the baseline 
receipts forecast.
    Just to emphasize this point, I would like to refer back to 
some work we did a number of years ago. Congress passed the 
Jobs and Growth Tax Relief Reconciliation Act of 2003, known by 
its clever acronym of JGTRRA. In figure 1 before you and on the 
screen, the red bars show CBO's January 2003, forecast of 
receipts. The Joint Committee staff estimated that the JGTRRA 
provisions, at least in the first couple of years, would have 
negative revenue effects. Now that did not mean that receipts 
would fall. On the figure, when we add the negative revenue 
effects to the CBO receipts, we get the green bars, which is 
the combination of baseline receipts plus change in those 
receipts as estimated by the Joint Committee staff.
    The one thing I want to emphasize is that, while lower, the 
green bars are still growing from year to year. So it was not a 
projection that receipts would fall. They would continue to 
grow but at a lower rate. And just to emphasize that point, the 
blue bars on the figure show the actual Federal receipts for 
those years. So, actually, in aggregate, our estimates did 
quite well that year. But the point I would like to make here 
is that the negative revenue estimate was still consistent with 
receipts growing overtime.
    Another frequently expressed misconception about our 
conventional revenue estimating methodology is the notion that 
the Joint Committee staff assumes that taxpayers will not 
change their behavior in any way in response to tax policy 
changes. It is true that one of the conventions that is 
followed by the staff is that we hold fixed a forecast of 
aggregate economic activity. However, within that, the Joint 
Committee estimates are never static in the sense that our 
estimates always take into account a number of likely 
behavioral responses by taxpayers, such as shifts in the timing 
of transactions, changes in the form of income recognition, 
shifts between taxable and non-taxable income or more highly 
taxed to more lightly taxed income, shifts between business 
sectors in terms of investment and the site of economic 
activity, changes in consumption behavior, tax planning, and 
avoidance activities.
    Beyond raising funds for the Federal Government, Members 
often intend that their proposed tax policy changes alter 
microeconomic behavior or the future growth prospect of the 
economy. Our conventional analysis generally addresses only the 
microeconomic behavior and does not account for possible 
changes in the underlying Congressional Budget Office 
macroeconomic assumptions.
    Since 2003 and the implementation of House Rule 13, for any 
legislation that has been reported by the Ways and Means 
Committee, the Joint Committee staff has prepared a 
macroeconomic analysis. To undertake this analysis, the Joint 
Committee staff has used several different models to simulate 
macroeconomic effects in order to reflect the sensitivity to 
different assumptions and to emphasize different aspects of the 
macroeconomy.
    The Joint Committee macroeconomic models that we currently 
use are the Joint Committee macroeconomic equilibrium growth 
model, which we cleverly call MEG, an overlapping generations 
model, and a dynamic stochastic general equilibrium growth 
model with infinitely lived agents.
    I will highlight briefly the MEG model and the OLG model 
just to provide some distinctions in terms of the types of 
assumptions that underlie these models, and then I will try and 
present an example of how we use these models to provide 
information to the Members of Congress.
    In the MEG model, the availability of labor and capital 
determines total national output. Prices adjust so that demand 
equals supply in the long run, but in the short run resources 
may be temporarily underemployed, or overemployed as people in 
businesses adjust to outside changes in the economy.
    One important feature of the MEG model is that household 
consumption is determined by what is referred to in economics 
as the life-cycle theory. Labor supply respond to changes in 
after-tax wages are separately modeled for four different 
groups of taxpayers that vary by income and type of worker. 
Household saving and consumption respond to the after-tax 
return to saving and to after-tax income. Business production 
and the production of housing are modeled in separate sectors 
with business investment responding to changes in what 
economists refer to as the user cost of capital. The MEG model 
is an open economy model. There are cross-border capital flows 
and changes in net exports that can affect the domestic 
economic outcomes. Another important feature in the MEG model 
is individuals are myopic. They do not anticipate changes in 
the economy or in government policy.
    By some contrast, the overlapping generations model assumes 
that prices adjust to any change in economic conditions so that 
supply always equals demand, period by period, and resources 
are fully utilized after accounting for adjustment costs that 
may occur as investment changes. There is no explicit modeling 
of international trading goods and services, but international 
capital flows are modeled through interest rate adjustments.
    Economic decisions are modeled separately for 55 different 
cohorts. There are separate production sectors for business and 
housing. Again, there are labor supply responses, saving 
consumption responses, and responses of investment to the user 
cost of capital. And the OLG model, unlike the MEG model, is a 
perfect foresight model. The individuals in the model figure 
out what is going on.
    Now how do we use these models? We take the detailed 
information that we produce in our conventional revenue 
estimates about how taxes affect individual taxpayers, 
individual businesses, and investments decisions, and we use 
those as inputs into the macroeconomic models.
    To try and give an example, in December of this past year, 
the Congress passed the Tax Relief Unemployment Insurance 
Reauthorization and Job Creation Act of 2010; and table 1 in 
your handout and this figure on the board shows you our 
conventional revenue estimate. It produced, by our conventional 
estimates, substantial revenue losses in the first couple 
years, followed by very modest revenue increases. The revenue 
increases were--again, projected relative to baseline receipts. 
They are a consequence of substantial timing changes that 
result from the expensing provisions for capital cost recovery, 
which were enacted as part of that legislation.
    Now concurrent with our conventional analysis, the Joint 
Committee staff undertook a macroeconomic analysis of the 
legislation using the MEG model and allowing varying different 
assumptions about how the Federal Reserve would respond. Would 
they aggressively fight future inflation or not? We also varied 
consumer and business responses to the tax changes in terms of 
labor supply response and investment response.
    I am going to try and briefly talk about these results to 
give you an idea of the type of information that is added by 
our macroeconomic analysis.
    What figure 2 shows is that the Joint Committee staff 
estimated under what we call our neutral Federal Reserve policy 
response measure--that the size of the economy as measured by 
GDP would increase by 0.6, to 1.7 percent during the extension 
period, primarily because of the extra demand that would be 
generated by the tax cuts.
    The staff also estimated that lower marginal tax rates on 
labor and on income from capital would provide an incentive for 
temporarily increased supplies of labor and accelerated 
investment. However, these effects are expected to be reversed 
by the end of the budget period as the tax decreases expire and 
increased borrowing by the Federal Government crowds out some 
of the private investment. So that in the latter part of the 
period--you can see on the far right the negative bars--GDP 
would decrease by two-tenths to five-tenths percent relative to 
present law.
    The second set of bars that I just flipped up shows an 
alternative Federal Reserve policy response, and it is 
important in analyzing macroeconomics to think about what else 
is going on and how the Federal Reserve monetary policy might 
affect outcomes.
    Now the December legislation was not deficit neutral. To 
highlight how tax policy changes might have macroeconomic 
effects, the Joint Committee staff simulated the same policy 
but assuming that government transfer payments would be reduced 
by the amount of reduction in the revenues. We simulated two 
different timeframes for this, either reducing government 
transfer payments year by year so the revenue and spending 
changes were in balance every year, on attentively reducing the 
transfer payments in the second half of the period so that 
revenue and spending changes were in balance over the 10-year 
period.
    My written testimony before you today has the details of 
that. What I will highlight here in my closing minute, where I 
have gone into overtime, is the revenue consequences that one 
might see from this. Because, remember, the key in 
macroeconomic analysis is, if the economy grows, there is a 
bigger taxable base, and so you might expect that there could 
be some additional revenue.
    The first set of charts shows under one set of assumptions 
just our conventional estimates of the December bill, the 
second shows what happens when we layer on the macroeconomic 
effects of that bill, and the third shows projections for when 
we consider that it could have been done in a deficit neutral 
fashion and, again, depending upon the Fed response.
    My colleagues and I always strive to update our models with 
the most recent possible data, looking at economic research. 
For example, we are currently exploring adding a more detailed 
international trade sector to the OLG model and additional 
business investment sectors to the MEG model. We always try to 
provide the Members with the best information we can.
    I appreciate this opportunity to try and give you a very 
brief walk-through of some of the work and modeling that we do, 
and I look forward to answering the Committee's questions.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Barthold follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman CAMP. Thank you very much, Mr. Barthold.
    Mr. Holtz-Eakin, you are recognized for 5 minutes.

 STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION 
                             FORUM

    Mr. HOLTZ-EAKIN. Thank you, Chairman Camp, Ranking Member 
Levin, and Members of the Committee for the chance to be here 
today. You have my written testimony, and I look forward to the 
questions. I will be brief in my opening remarks.
    I think there are three major points to be made. The first 
is that dynamic scoring is good science, and that is simply the 
case because the Committee should be interested in all of the 
responses in the economy to changes in tax policy, including 
the overall level of economic growth, and to exclude that 
arbitrarily is not good science. So the principles of dynamic 
scoring really should not be in debate.
    The second point I would like to make is that the Committee 
needs to make some decisions in order for dynamic scoring to 
become operational and to achieve one of the chief objectives 
of scoring which is to be able to rank proposals in a 
consistent fashion, and I think that is where some very tough 
but not insurmountable decisions would have to be made.
    In particular, I have considerable sympathy to the 
difficulties that Tom Barthold and his staff would have in 
executing this on a regular basis. So the Committee would have 
to include in its process enough time to do this analysis on a 
regular basis. There is no way around that.
    Next is the Committee would have to decide on a single 
approach. You have seen three alternative macroeconomic 
approaches to doing the modeling. In order to get consistent 
ranking proposals, you are going to have to settle on a single 
approach so that when you look at two different tax reforms you 
can compare them in a consistent fashion. That would require 
settling at least on a year-by-year basis some of the tough 
questions about how forward looking people are and the degree 
to which you are going to recognize the business responses.
    I think that is especially important in the debate over tax 
reform. There is no question that, at the moment, we would 
benefit from pro-growth tax reform where we were providing 
better incentives for the accumulation of human capital, 
technological skills, and fiscal capital. But it is also the 
case that we have woefully underutilized labor and capital 
resources in the economy right now. And to adopt good policies 
that both bring us back to full employment and raise the 
capacity at full employment to grow more rapidly I think is the 
objective. You are going to have to get both into the analysis 
in one way or another, and deciding the rules for doing that is 
crucial.
    Third point in this regard is this issue of other policies 
that are going on in the economy. You will have to simply 
decide two important rules of thumb by which the Committee will 
operate. One would be what will you assume on a regular basis 
about the Federal Reserve so that each and every tax reform is 
accompanied by a comparable Federal Reserve response and you 
can get the ranking of them correct? The second, and I think 
the harder one, will be deciding how you will provide for 
budgetary offsets when a tax reform loses money or gains money 
at certain points in time.
    At the moment, we have two difficulties in this modeling. I 
want to emphasize this. The first is actually quite remarkable, 
and that is for some of these models, particularly for ones 
where there is tremendous foresight, those models simply cannot 
be calculated, meaning the computer algorithms will not run if 
the Federal Government's budget is on an unsustainable 
trajectory.
    Our Federal budget is on an unsustainable trajectory. So in 
order to actually do the analysis you have to make some 
assumption about how to get the debt stabilized relative to 
GDP, and that is even before you can do the analysis of the tax 
reform.
    The second piece is that when you do the tax reform 
analysis you have to have a regular and predictable offset for 
any budgetary gains or losses. Will it be spending cuts? Will 
it be tax increases out further in the future? The economy will 
react very differently depending upon how you do it. You have 
to decide upon a set of procedures which may seem arbitrary but 
which allow you to do the business on a regular fashion.
    So the short message is that there will be a whole series 
of things that the Committee will have to decide in order to 
make this operational. They may be better or worse from a 
predictive point of view. I want to emphasize what Tom said 
about the difference between the forecast and the scoring. They 
may be better or worse from the prediction point of view, but 
they will allow you to rank things.
    I will close with simply the reminder that this will not be 
a panacea. You will not find yourself dramatically changing the 
Federal budgetary outlook over especially the first 5 years on 
the basis of dynamic scoring. You will, however, probably adopt 
better tax policies from the perspective of jobs and growth. I 
think that should be the focus of the Committee's 
deliberations.
    Thank you.
    [The prepared statement of Mr. Holtz-Eakin follows:]

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    Chairman CAMP. Thank you very much, Mr. Holtz-Eakin.
    Mr. Buckley, you are recognized for 5 minutes.

 STATEMENT OF JOHN L. BUCKLEY, VISITING PROFESSOR, GEORGETOWN 
                     UNIVERSITY LAW CENTER

    Mr. BUCKLEY. Thank you, Mr. Chairman and Mr. Levin, for the 
opportunity to speak to you today.
    I will echo Mr. Levin's remarks about the amount of work 
and the skill that has been brought to this task by the Joint 
Committee staff. However, they, like every other economist, are 
faced with the fact that it is virtually impossible to model--
for any economic model to accurately reflect our complex 
economy with global flows of capital goods and services. 
Therefore, these models, by necessity, use simplifying 
assumptions, and those simplifying assumptions often bear 
little relationship to reality.
    They are also, as both Tom and Doug pointed out, very 
dependent on assumptions of what other governmental agencies 
will do, including both the Federal Reserve and foreign 
governments, how will they respond to the tax policy.
    The impact on important sectors like health care, housing, 
or manufacturing are not measured by these models or measured 
only in very partial ways. Tax reform could easily remove long-
standing tax benefits for these important sectors with 
consequences that this Committee needs to understand. The 
models do not provide that insight at this time.
    I would suggest before this Committee places a greater 
importance on these models, this macroeconomic analysis, there 
are important questions for which they should seek answers.
    The Reagan tax cut in 1981 promised large economic benefits 
because of its rate reductions. Why did a study by Martin 
Feldstein on the impact of the 1981 Tax Act conclude that it 
had no net impact on economic activity?
    The 1986 Tax Reform Act is very similar in structure to 
what people are talking about today, rate reductions coupled 
with a broadening of the tax base. Under standard economic 
theory, you would have seen a labor response and a capital 
response. Yet a study conducted by the University of Michigan 
found no measurable impacts on the real-world factors that 
economists care about.
    In 1993, opponents of the Clinton tax increases could 
rightfully say that virtually every economic model in the 
country projected that that Act would reduce economic growth 
and reduce jobs. The response in the economy was totally 
different. The economic projections that accompanied the 2001, 
the 2003, and for that matter the 2009 tax reductions have not 
been reflected in the real world. The job growth and economic 
growth following those Acts was far less than what was 
predicted. I would suggest the Committee needs to explore why 
those projections were wrong before they place greater impact 
on this analysis.
    I also agree in many respects with what Doug has said. The 
question to me is whether you use these models for analysis or 
scoring. They can provide important insights in designing tax 
policy, and you can fix the assumptions so all tax policies are 
judged the same. But the real question is whether they will be 
used for scoring of (budget estimates), and that is where I 
think there is real risk of doing damage.
    These are very uncertain economic projections, even the 
best of the models. If you base your budget estimates on these 
models and those budget estimates do not have credibility in 
the financial markets, you risk serious adverse consequences. 
The models have to be both understandable and credible to the 
financial markets before they can be used in making budget 
estimates or I think you risk great harm. They also have to be 
based on assumptions that the financial markets find credible, 
and many of the assumptions today do not reflect our economy.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Buckley follows:]

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    Chairman CAMP. Thank you, Mr. Buckley.
    Mr. Beach, you are recognized for 5 minutes.

   STATEMENT OF WILLIAM W. BEACH, DIRECTOR, CENTER FOR DATA 
               ANALYSIS, THE HERITAGE FOUNDATION

    Mr. BEACH. Thank you very much, Mr. Chairman, Congressman 
Levin.
    It is difficult to find economists who would argue that the 
Federal Government's tax and spending policies just make 
absolutely no difference to U.S. economic performance. In this 
age of massive and growing Federal debt, it is even more 
difficult to find a politically engaged citizen who fails to 
see the connection between Federal fiscal policy and economic 
performance. Indeed, all across the political spectrum and 
throughout the leading schools of economic thought a broad 
consensus exists that what governments do with tax dollars and 
their outlays as well and how they raise revenues matters in 
the larger dynamic economic world.
    Thus, it is crucial that economic models that organize 
complex theory and data be available and used by policymakers 
to chart the most beneficial course for the country, given the 
policy options available to us. I agree very much analysis is 
hugely important. Some observers, however, would warn 
policymakers away from the use of economic models entirely, 
even to analyze the likely outcomes of policy change. But the 
usefulness of the policy tools far outweighs the known 
disadvantages. Indeed, the absence of dynamic economic analysis 
in major policy debate should be enough to stop such a debate 
until it is informed by such analysis.
    Today's economic policy models carefully sort through the 
fundamental requirement that behavioral changes be prominent 
drivers of economic estimates. Likewise, today's complex and 
nuanced models nevertheless perform with the speed that 
policymakers require. It is in fact unacceptable to deliver 
estimates of how policy change will likely affect economic 
activity after the policy change has been adopted.
    To be frank, there is also the view that dynamic scoring 
and analysis--and those are two different processes--is a part 
of the legislative process advanced by advocates only of tax 
reductions and limited government. This misimpression has done 
much to keep this useful tool out of the policymakers' hands. 
Let me illustrate.
    Heritage used a model of the U.S. economy in 2007 to 
estimate the economic effects of the tax bill advanced by then-
Chairman Charles Rangel--Congressman Rangel, who is before us 
today--when he chaired the Ways and Means Committee. Chairman 
Rangel's reduction of the corporate income tax rate from 35 to 
33 percent in fact drew Heritage's praise, and our model 
indicated that this rate reduction alone would support the 
creation of as many as 220,000 jobs. Other provisions of 
Chairman Rangel's plan, however, we thought neutralized that 
very good effect.
    It may surprise some on this Committee to learn that 
Heritage's Center for Data Analysis has published the only 
dynamic analysis and score of the justly famous tax reform 
proposal of Senators Ron Wyden and Dan Coats, which previously 
that bill was cosponsored, as you know, by Senator Judd Gregg. 
Our analysis showed policymakers that this bipartisan reform 
effort could potentially mean that the Federal deficit would be 
$61 billion lower per year; the Nation's debt-to-GDP ratio 
would be 3.9 percentage points lower in 2020; there would be 
2.3 million more jobs created on average in each of the years 
in which the tax reform had full effect.
    No one knows, of course, what policymakers will do, even 
when they possess the very best analytical tools. This we do 
know, however: The standard conventional or static tax models 
used today by the official revenue estimators at the Joint 
Committee in the absence of their dynamic analysis could 
produce highly inaccurate revenue estimates and estimates of 
economic effects. It is this record of inaccuracy and, thus, of 
bad policy advice that has fueled the interest in dynamic 
analysis over the past 20 years in which I have been working on 
this issue.
    In the real world, we know that businesses and consumers 
will respond to both tax cuts and tax hikes, and they will do 
so in fairly predictable fashions. Tax cuts often, but not 
always, spur investment, which spurs hiring and increases 
payroll taxes; and they lead to a positive feedback effect for 
government treasuries. Yet it is exactly this kind of feedback 
effect that static analysis misses.
    Advocates of dynamic scoring must be careful not to 
oversell its capabilities or benefits. There are legitimate 
disagreements about which economic model best captures the 
economic effects of tax policy changes. Even so, we get better, 
more transparent government by encouraging the introduction of 
more economics into the evaluation of tax policy choices and 
the occasional use of dynamic scoring models to advise 
policymakers on really big tax bills. Better government and 
better tax policy is, I believe, a winning combination of 
benefits that assures the widespread adoption of dynamic 
analysis in the process of creating tax policy.
    Thank you very much.
    [The prepared statement of Mr. Beach follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman CAMP. Thank you very much.
    Thank you all for your testimony.
    Mr. Holtz-Eakin, the Committee has heard from a number of 
witnesses this year that comprehensive tax reform that broadens 
the base and lowers rates will help spur economic growth and 
job creation. Can you walk us through the economics of why this 
is the case and how that might manifest itself in economic 
models that analyze any proposal. And what is it about that 
type of reform that would promote growth?
    Mr. HOLTZ-EAKIN. Economies grow in two ways. The first is 
by increasing their capacity to produce; and that comes from 
giving up something in the present and investing in either 
physical capital, factories, equipment; skills and human 
capital, better, more productive workers; or new technologies 
and a higher level of innovation.
    The tax system influences that in deep and fundamental ways 
because individuals have to give up something now for a return 
in the future, and taxes affect those returns. As a result, a 
tax system that is fundamentally reformed to lower marginal tax 
rates and take less of that return will incentivize people to 
undertake those activities. If it is a reform that is durable 
and predictable, it will also give them greater confidence in 
those future returns and, by removing that uncertainty, 
incentivize activities. So it is not really complicated. It is 
at the core of the nature of economic growth.
    It is also true at the moment that the economy can grow by 
utilizing the existing resources. We have millions of workers 
out of work, we have lots of factories not in use, and if we 
were to undertake fundamental tax reform right now we could 
spur immediate activity on top of these long-run impacts.
    I think, for example, a corporate rate cut would right now 
change the valuation of our existing capital. So we would see 
equity values go up. That would make household balance sheets 
better. They would spend more. It would change the incentives 
for business to invest right now and thus lead to the kinds of 
feedbacks on to hiring and payroll taxes that Bill Beach 
mentioned. It would also change international location 
decisions, which happen quickly, where you could get capital 
flows into the economy.
    So, in both ways, fundamental tax reform can spur immediate 
growth and long-run growth.
    Chairman CAMP. Thank you.
    Both for you and Mr. Barthold, as Mr. Holtz-Eakin just said 
in sort of response to this question, I understand a dynamic 
analysis would analyze the impact that reform could have on the 
supply of labor and capital. As he mentioned, idle factories, 
workers out of work. So, given our current economic conditions, 
with high unemployment and large amounts of capital sitting on 
the sidelines, do you think the benefits of reform could be 
even larger than historical assumptions? Or, put another way, 
do the current group of economic models sufficiently recognize 
the excess capacity that I have just mentioned?
    And if each of you would like to respond or, Mr. Barthold, 
if you would like to go first.
    Mr. BARTHOLD. As Doug noted, macroeconomic growth occurs 
both from increases in aggregate demand and increases in 
aggregate supply. Generally, people tend to think of the 
aggregate demand effect as more of a short-term effect. The 
point that you were just raising, Mr. Chairman, with the excess 
capacity means if there were an increase in demand then we 
could put resources to work even without expanding the 
economy's future capacity.
    In terms of models and what they show, actually, our MEG 
model is structured to attempt to analyze what economists would 
generally think of as disequilibrium outcomes. In other words, 
our current relatively high unemployment can be reflected in 
short periods of time in our MEG model while over the long run 
it provides more equilibrium outcomes. Is that model perfect? 
No.
    Another factor that I think your question also raised is 
are we reflecting the range of outcomes you could see. One 
thing that I tried to emphasize a little bit was the difference 
between--and Doug mentioned this, also--the difference in Fed 
responses. You would expect with current high unemployment that 
the Fed would be more neutral and would let the aggregate 
demand incentives, the improved cash flow aspects of the tax 
reduction, for example, flow through to consumers without 
trying to fight inflation by raising interest rates in the 
short term, with interest rates being increased. So that would 
provide some short-run and some of the longer-run crowding-out 
effects.
    As whether there are facets that the models try to capture 
perfectly and across all sectors obviously, I have to say the 
answer to that is no and we are still working on it.
    Mr. HOLTZ-EAKIN. So I think the key for this Committee is 
that if you were to go forward with an approach that 
encompassed, as the MEG model does, both the near-term business 
cycle impacts and the longer-term supply side growth you could 
do that in a way that was rigorously comparable both over time 
and at any point in time across proposals. You would always be 
starting from a baseline.
    That baseline at the moment reveals enormous unemployment--
we are starting from a very low level of economic activity--
and, as a result, could show quite potentially large business 
cycle gains. At other points in time, the baseline perhaps 
right at full employment, the same modeling approach would not 
give you any business cycle gains because you are already at 
full employment. It would only have the supply side approaches.
    So I don't think there is any disqualifying problem with 
having that kind of approach. The baseline would capture the 
starting point and the degree to which you could get the near-
term gains.
    In the same way, having a consistent rule for how the Fed 
reacts, the Fed is unlikely with large amounts of unemployment 
to be raising rates at a rapid rate, and a rule for how the Fed 
behaves would capture that. So I don't see any overwhelming 
obstacle to instituting a set of procedures that were 
consistent at any point in time and captured what is going on 
in the economy over time.
    Chairman CAMP. All right. Thank you.
    Mr. Levin is recognized.
    Mr. LEVIN. Mr. Chairman, I want to state clearly why I 
think this hearing is perplexing and potentially 
counterproductive. We need analysis. We also have a crisis 
facing this country and its families. A jobs crisis. A growth 
crisis. We have proposals presented by the President of the 
United States relating to economic growth and jobs. Most of 
those proposals are in the jurisdiction of this Committee. We 
should have an analysis of those. We should have hearings on 
those.
    We have one analysis--I don't know if you call it dynamic, 
but let it not misshape what the challenge is before us. So one 
analysis, as I mentioned in my opening statement, Mark Zandi's, 
is that the President's Jobs Act would add 2 percentage points 
to GDP growth next year and 1.9 million jobs.
    Mr. Holtz-Eakin, you say in your testimony we should not 
overestimate, that we should have little reason to believe tax 
cuts, even the best, will pay for themselves, and that over 10 
years, no matter what scoring, it is unlikely that there will 
be a major impact, whatever model you use. And here we have a 
jobs crisis, and we need to hold hearings on that.
    So, look, I remember the fight over the proposal in 1993. 
There was some macroanalysis that said, as mentioned here in 
the testimony, it would lose jobs, et cetera. It would ruin the 
economy. And it helped lead to a major series of years 
characterized by economic growth and jobs. So that is why it is 
perplexing.
    So let me just ask Mr. Buckley a question, if I might, 
because the chairman asked about tax reform. Lowering the rate 
and widening the base theoretically has something going for it. 
But you have to discuss what it takes to do that. You have to 
discuss that. I took economics 101 at Columbia. My professor 
later won a Nobel prize for economics. I don't think that 
helped me very much. I tried.
    So I want to ask you, Mr. Buckley, if as part of widening 
the base and lowering the rate, you eliminate all of the 
deduction for mortgage interest, the deduction for State and 
local income tax, if you include in income the cost of 
employer-provided health care, if you eliminate the charitable 
deduction and the exclusion of interest paid on State and local 
bonds, if all those are eliminated, what is the analysis?
    Mr. BUCKLEY. Mr. Levin----
    Mr. LEVIN. Macro or micro?
    Mr. BUCKLEY. However you do it, I do believe that the 
details of a tax reform matter dramatically. The economists who 
claim there are large economic efficiency benefits from tax 
reform are modeling a specific proposal. Essentially, their 
vision of what should be an ideal tax system, probably not a 
vision that this Committee would adopt. They cannot analyze tax 
reform without a specific proposal. This Committee cannot, 
either. Some types of tax reform could result in a net tax 
increase on U.S. manufacturing by repealing large benefits for 
the manufacturing sector.
    Mr. LEVIN. Is it your proposal today to pay for----
    Mr. BUCKLEY. For the rate reduction.
    Mr. LEVIN. By eliminating the remaining money in 136, which 
I think is mindless.
    Chairman CAMP. It does not eliminate the remaining money in 
136. There is a reduction in the 136 dollars. It does not 
eliminate.
    Mr. LEVIN. The remaining money.
    Chairman CAMP. It is a big distinction. It is 1.5. I think 
there is 7 billion left.
    Mr. LEVIN. But that is all spoken for. That is all spoken 
for. If you look at what is in the hopper now, it eliminates 
what isn't spoken for.
    Mr. BUCKLEY. That is what I think--the one thing the models 
do not do very well is analyze the impact on sectors. If you 
repeal current law benefits for owner-occupied housing, I 
believe you will see a reduction in home prices. I believe that 
those benefits are capitalized in the current value of our 
homes.
    Now that may be desirable economic policy, but you need to 
know what impact that would have on the economy and whether you 
can mitigate those effects through transition rules. Until you 
have those details--and that is really what this debate is 
lacking, is a detailed proposal--you do not know what the 
consequences of the tax reform will be.
    Chairman CAMP. All right, thank you.
    Mr. Herger is recognized.
    Mr. HERGER. Thank you, Chairman Camp.
    I would like to ask Mr. Barthold about how the scoring 
process considers administrative and compliance costs. In 2006, 
Congress passed a 3 percent withholding tax on government 
agencies' payments for goods and services. Joint tax scored 
this provision as raising Federal revenues by $7 billion. 
Subsequently, however, the Department of Defense released a 
study finding that, for DoD alone, the cost to implement this 
new tax would be over $17 billion. This means the government 
would be spending far more to collect this tax than it raises 
in revenue.
    Another independent study estimated that the cost of 
businesses to comply with this withholding requirement could be 
over $40 billion. In general, the high cost of tax compliance 
means less money is available for small business to invest in 
job creation, and many of us are hopeful that simplifying the 
Tax Code would reduce this burden and thus spur economic 
growth.
    Mr. Barthold, does the current scoring process incorporate 
the cost to the IRS and other Federal agencies to administer 
specific tax provisions?
    Mr. BARTHOLD. Thank you, Mr. Herger.
    What we are estimating for the Committee Members are the 
receipts' effect to the IRS. We try to bring into the process 
at the staff level issues of what it will take for different 
agencies or different taxpayers to comply. But the estimates 
themselves do not include direct estimates of compliance costs 
except to the effect that compliance and complexity affect 
taxpayer behavior.
    If I could--I know I am on your time, but if I could make 
one note about the $7 billion estimate that was done for the 3 
percent withholding at the time that TIPRA was enacted, I think 
it is important for the Members to recognize that estimate has 
two components. Because it is a withholding provision, it has 
the effect of accelerating tax payments within the fiscal 
budget period. And that was the bulk of the $7 billion 
estimate, was an acceleration of payments into the Treasury.
    There was a second component which was smaller, but not 
insignificant, of ongoing compliance gains. Because as I know 
the Committee was aware because they had heard testimony, there 
was some substantial noncompliance by government contractors in 
terms of paying their legally due income and payroll tax 
liabilities, and that is what had motivated the enactment of 
that proposal.
    I hope that addresses your question, Mr. Herger.
    Mr. HERGER. Well, Mr. Barthold, it would seem to me again 
where just one department, the Department of Defense, estimated 
that its costs would be more than double the revenues coming 
in, it would seem that we are getting an incomplete picture of 
how tax changes affect a budget. And if tax policy creates new 
administrative costs for the government, then we have to either 
increase total appropriations or agencies have to sacrifice 
other priorities. Conversely, if tax reform reduces 
administrative costs, that should generate savings in the 
discretionary budget.
    Mr. Holtz-Eakin, from your experience at CBO, do you have 
any thoughts on this topic?
    Mr. HOLTZ-EAKIN. I am certainly not familiar with the 
specifics of that proposal. I do know that when CBO undertakes 
to score proposals it has to make some judgement about the 
likely implementation of the rulemaking, the time it will take 
for that rulemaking, and, as a result, when the Federal budget 
is affected. And it also has to make some judgment about 
overall discretionary funds that will be necessary to implement 
it. So I think this is part and parcel of doing estimates--
impacts on the Federal budget.
    Mr. HERGER. Thank you, Mr. Chairman.
    Chairman CAMP. Thank you.
    Mr. Johnson is recognized.
    Mr. JOHNSON. Thank you, Mr. Chairman.
    I am asking that--Mr. Barthold, I want to ask you about the 
revenue impact analysis for the 2003 tax cuts and in particular 
the capital gains tax cut. I am sure you're familiar with the 
July 24th Wall Street Journal edition on tax oracles. This is 
it.
    Mr. Chairman, I would like to get this introduced into the 
record, if I could.
    Chairman CAMP. Without objection.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. JOHNSON. Thank you.
    The editorial points out there was a surge in tax revenue 
following the 2003 tax cuts. The surge simply was missed by the 
budget scorekeepers. In particular, with respect to the capital 
gains tax cut, the Wall Street Journal points out the 
behavioral model that Mr. Barthold celebrates predicted that 
the capital gains cuts would cost the government just under $10 
billion from 2003 to 2007 when the actual capital gains 
revenues over 5 years were $221 billion higher than JCT 
predicted.
    Mr. Chairman, I think I would like to ask Mr. Barthold, why 
was the analysis so wrong with respect to the revenue impact of 
the capital gains tax cut?
    Mr. BARTHOLD. Thank you, Mr. Johnson. As our staff pointed 
out in some of the background material that we prepared in our 
overview, we tried to account for taxpayer behavioral 
responses, including capital gains realizations. Because it is 
entirely discretionary, it is a very difficult area. In the 
document that we published in advance of this hearing, JCX 46-
11, we noted in particular that compared to baseline 
projections of capital gains and a simple static sort of 
analysis of saying if you change the rate of tax on those 
gains, what would happen to receipts, that our modeling at the 
time of 2003 had over 70 percent of the static effect offset by 
behavioral change. So we had a substantial behavioral component 
to that particular estimate.
    The Wall Street Journal's discussion I think makes some--
without knowing completely what they are trying to compare--I 
think they have some confusion in what they take as the 
baseline projections for capital gains as opposed to overall 
receipts. In part of this particular editorial and the 
editorial that they had prior to this editorial, they seem to 
display some confusion about the point I made earlier regarding 
whether our estimates are about receipts or a change from the 
baseline of receipts.
    But that said, as I noted in my testimony, we always strive 
to try to update and present to the Committee information based 
on the best estimates possible. Because of the importance of 
the capital gains in the tax policy debate, it is one area that 
we are reviewing. We have a research project underway right 
now. In fact, we have just submitted to a small professional 
conference of academic economists a proposal to present some 
preliminary results from this research that we would use to 
change our modeling.
    So all I can say is we do our best overall on----
    Mr. JOHNSON. Well, I recognize it is not a simple thing. 
But in light of the revenue figures, do you not believe that 
cutting the capital gains tax rate, as Congress did in 2003, 
can have a positive macroeconomic impact? In other words, do 
you not believe a tax cut such as the 2003 capital gains tax 
cut can lead to greater investment, job growth, and perhaps 
higher tax revenues?
    Mr. BARTHOLD. Mr. Johnson, on that point you actually enter 
sort of a different realm about what is the macroeconomic 
transmission mechanism of particular policy changes. Reducing 
the tax on capital gains increases after-tax returns to 
individuals' savings, particularly in the form of equity 
investment. The way we would analyze that is that is one 
component of how people save. Other considerations: Do we shift 
out of dividend-paying stocks into stocks that accrue more 
gains; do we alter portfolios that have less debt, more equity? 
That all goes into the type of analysis that I tried to present 
to you briefly this morning.
    So by increasing the after-tax return to savings, there 
should be some positive effects on savings.
    Mr. JOHNSON. Thank you, Mr. Chairman.
    Chairman CAMP. Mr. Rangel is recognized.
    Mr. RANGEL. Thank you, Mr. Chairman. Thank you for this 
enlightening hearing that we are having. I gather from the 
Joint Committee that the purpose that this panel is here is to 
share with us the resources that you have available to us as 
tax writers, if and when we move forward with tax reform. And 
my question to you: Does anyone here have any reason to believe 
that we will be using this information in order to reform the 
tax system?
    I guess not.
    Mr. BEACH. The answer is yes.
    Mr. RANGEL. Then could you share with me what allows you to 
believe that this Congress will be reforming the tax system? 
What have you heard; what indications? Because I have been on 
this Committee longer than anyone else and I received no signal 
that my Committee will be moving into tax reform in this 
session. Because, as you pointed out, I have been a strong 
advocate of tax reform, I think it increases revenue. It is 
fair. It is more equitable. So share it with me, Mr. Beach.
    Mr. BEACH. I don't know what the Committee will do, 
obviously. I am not sitting where you are sitting. And I hope 
that you do tax reform, and do it very soon, and you follow 
some of the principles that you laid out when you were chairman 
of this Committee.
    I will tell you that as a long-time person whose group 
helps Members of Congress shape their bills and does some 
analysis of their bills to help them understand better, I am 
getting a lot of business. I think as a market indication, 
there is a strong interest among Members of this Committee and 
Members outside of this Committee in reforming the taxes. But I 
think also a lot of Members understand that there is a dance 
that has to be held here. And one partner is tax reform and the 
other partner is overall fiscal reform. And it is the 
difficulty of finding how you in fact dance with those two 
partners.
    Mr. RANGEL. What you are saying, Mr. Beach, is that it is a 
complex and sensitive subject politically. I don't see how you 
think we can overcome that problem this year. And I know you 
are not talking about having this Committee move into a tax 
reform mode next year.
    I guess my real question to you, based on your experience, 
when the President has a tax proposal of any kind, as he 
recently reported, you don't believe that you can really be for 
or against it until the Committee of jurisdiction reviews it 
and has hearings on it. Would you agree with that statement?
    Mr. BEACH. That is a matter for the Committee to take up. I 
know there is tremendous interest in this outside.
    Mr. RANGEL. You pay taxes. You are going to be affected by 
what happens here. Now, you have a 12-Member Committee. You 
know what the Ways and Means and the Finance Committee's 
responsibility is. You know about deadlines that we have. I 
hope you are not suggesting that you think that we can do tax 
reform between now within the deadlines that the Congress has. 
Is that what you are telling me?
    Mr. BEACH. You shouldn't do it. If you are not started 
right now--you should take your time to do tax reform.
    Mr. RANGEL. That means that you agree with me. You don't 
think it is the right thing to do to start tax reform now, with 
all of the congressional restrictions that we have on 
timetable.
    Mr. BEACH. You have already started tax reform. There are 
so many discussions going on. But this Committee and the 
Congress has a duty which is even greater than that, and that 
is to plot a course through the most difficult financial 
challenge that this country has faced perhaps in the last 100 
years. And tax reform is part of that. But also major changes 
to our spending priorities is part of that as well.
    Mr. RANGEL. Thank you, Mr. Chairman.
    I assume that means that you don't expect us to do tax 
reform this session.
    Chairman CAMP. All right. Mr. Tiberi is recognized for 5 
minutes.
    Mr. TIBERI. Thank you, Mr. Chairman. Mr. Barthold, I want 
to follow up on the line of questioning from Mr. Levin 
regarding the President's Jobs Act and how you model that Jobs 
Act.
    Let me give you a real-life example and tell me how your 
process applies to this. I had a discussion Monday with a 
constituent who is part of a family-owned business. They are an 
S Corp. He and his wife were looking at making an investment 
decision, and they were down the road of making this decision. 
The President's proposal has an impact on that investment 
decision, and thus he and his wife now have put a hold on that 
investment decision and--an investment decision that 
theoretically would create jobs and opportunity. And so based 
upon the President's proposal, that is stopped. And it is going 
to stop for maybe forever, based upon the President's proposal 
and what happens to it.
    How do you and your folks at Joint Tax figure that out and 
apply it to real life?
    Mr. BARTHOLD. Mr. Tiberi, you raised a really important 
issue in economic modeling, and that is how to account for 
individuals' or businesses' expectations. As you have described 
your constituents, they apparently feel pretty strongly about 
the uncertainty that is created by introduced legislation. We 
try to account for, as I noted, taxpayer behavior in all the 
estimates that we do. What is particularly difficult, I think, 
in what you proposed is what does that do to the baseline? We 
make these estimates relative to baseline receipts. And the 
baseline receipts projections aren't assuming that there is any 
change in law. So our baseline receipts projections assume that 
a lot of investments would have gone on as projected under the 
macroeconomic projections of the Congressional Budget Office.
    The situation you posed is you think that legislative 
uncertainty may change the course or timing of those 
investments. Now, when that gets picked up is when the 
Congressional Budget Office redoes its macroeconomic forecast. 
If they redo the macroeconomic forecast, that will then be 
reflected in what we think about the course of the economy, the 
course of receipts from business income. But as you posited 
this particular situation, that is sort of missed in the 
economic modeling right now because your constituents had 
something they were thinking of doing in, let's say, the next 6 
months, and now they are not because of legislative 
uncertainty.
    We have recently had a revision in the CBO macro forecast. 
We are not picking up in anything that we are doing on Capitol 
Hill, in our modeling, really, that reflects that kind of 
uncertainty and changed decision because of current legislative 
uncertainty.
    Mr. TIBERI. Since CBO is mentioned, Mr. Holtz Eakin, can 
you comment from your perspective when you sat at CBO?
    Mr. HOLTZ-EAKIN. I would concur that incorporating 
explicitly policy uncertainty is one of the real weak points of 
the current state of economic science. In that regard, if I 
could, I think it is important to distinguish between scoring 
and forecasting. Think about football. For reasons that I don't 
know, if you get a touchdown, you get six points. If you kick 
the extra point, you get one. If you run or throw it across, 
you get two. I have no idea why. Because those scoring rules 
allow you to compare two teams, they allow you to compare games 
across the country and over time.
    And that is what you want out of good rules to evaluation 
legislation. You want to be able to score them consistently. 
You would also like to be right. But the Committee operates in 
areas where, quite frankly, often it is impossible to be sure 
you are right. We passed the Medicare Modernization Act when I 
was at CBO. There had never before been a product which was 
insurance for the cost of outpatient prescription drugs offered 
by the Federal Government. We developed scoring rules so that 
there are more and less expensive ones. We had no idea if we 
were right. It turned out we were way too high. Probably 30, 40 
percent too high. Over time now, I think scores of prescription 
drug estimates will get better.
    I think the same will be true for the Joint Committee. If 
you go down this route, you will bring into the scoring 
additional information--growth consequences--and they won't be 
right the first time. But they will get better and better. And 
at every point in time, you will be playing fair across the 
proposals. That is the key.
    Mr. TIBERI. My time is expired. Thank you, Mr. Chairman.
    Chairman CAMP. Mr. Davis is recognized.
    Mr. DAVIS. Thank you, Mr. Chairman. I would like to 
continue in that line of questioning, Mr. Eakin.
    In your testimony you suggested coming up with a new single 
approach to estimating that provides uniformity of scoring 
while taking aspects of both static and dynamic scoring into 
account. How does the current regime produce scoring estimates 
that result in qualitative differences, in your opinion?
    Following on that, how do you think a new system would 
treat, comparatively, a reduction in marginal rates versus, 
say, the credit from State and local sales taxes? I am not 
looking so much for a specific answer on the second, but trying 
to get to a more realistic aspect.
    Mr. HOLTZ-EAKIN. I think that it is important if you are 
worried about economic growth, particularly over the long term, 
longer horizons. You want to have a system that reflects the 
fact that there is a big difference between a revenue-neutral 
tax reform that cuts marginal rates, broadens the base, and one 
that might, say, jack rates up on every taxpayer in America and 
then provide a refundable credit to exactly the same people. It 
would be revenue neutral. Some people might take that cash and 
spend it. It might look like a good idea in the near term. But 
over the long term, those are terrible incentives for labor and 
capital and growth. And you want the process to reflect those 
incentives. Static models will not capture the longer-term 
index.
    Mr. DAVIS. Anybody else like to comment on that? Mr. 
Buckley.
    Mr. BUCKLEY. The only thing I would say is, there is a 
sharp difference between analysis and scoring. I think a lot of 
these models may be useful in analyzing different proposals and 
the comparative benefits. When you are doing that, the 
Committee can specify assumptions that they want the Joint 
Committee to follow. I don't think you can do that for the 
actual scoring of the legislation. Do exactly what Doug has 
suggested. Put the assumptions in there and you can compare 
different proposals across the board. But if you use that for 
determining the budget score, what you reflect as the budget 
cost of the bill, the perception of political interference, if 
this Committee sets the assumptions--and somebody has to do 
that--those estimates then have no credibility. And I think you 
run a real risk in the financial markets if you use that type 
of estimate in determining the ultimate cost of the bill.
    I think that is the real question here for the Committee. 
Analysis is fine and good. You want more information. But you 
should be very careful before you take that final step and say 
that the actual official score of the legislation is determined 
with regard to these models and with regard to the assumptions 
that the Committee specifies.
    Mr. DAVIS. Thank you. Mr. Eakin, you wanted to add an 
additional point.
    Mr. HOLTZ-EAKIN. I think this is the right discussion. I 
think I come down at a different place. Point number one is 
that I see no qualitative difference between the kinds of 
uncertainty that surround these growth effects and the 
different models that capture them and the kinds of uncertainty 
that surround the conventional micro uncertainty around a lot 
of scores. We did scores for terrorism risk insurance. I hope 
we never find out how accurate they are. There are fundamental 
questions of uncertainty that pervade the scoring process. 
There is nothing new about that here.
    I also come down on a different place on the financial 
markets. They use these models every day in order to evaluate 
exactly what you are doing. So I don't think they are going to 
be at all phased by the fact that you use them to make your 
decisions better. They are using them right now.
    The third thing I would say is there will be some arbitrary 
decisions. And the goal to make them appear to be done in an 
evenhanded, nonpolitical fashion is an important one. 
Transparency would do a lot to solve that.
    So I think there is a route forward.
    Mr. DAVIS. Mr. Beach.
    Mr. BEACH. There is one thing I would want to remind the 
Committee, is that when they take a score of an important bill 
from the good people at the Joint Committee on Taxation, it is 
not based on an economic model. Be under no misimpression. You 
have used an economic model to get to that score. What you are 
assuming is the economy does not have an effect. So any way, 
shape, or form, when your scores come in there is an economic 
set of assumptions behind that.
    What we are saying on this panel--I think we are all 
agreed--is that you need to have the best information, the best 
advice possible to plot that good course to a better economy. 
And that is why dynamic analysis is so crucial and it should be 
part of the routine pieces of information that come to this 
Committee.
    So when you get a static score, the assumption is the 
economy is not working there. There might be microeconomic 
behavioral assumptions built in, but the general economy is not 
responding. That is the assumption made by the static score.
    Mr. DAVIS. Thank you, Mr. Chairman. I yield back.
    Chairman CAMP. Mr. McDermott is recognized.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Chairman, I 
have spent 40 years sitting in Ways and Means Committee, 17 
years in the State legislature, and 23 years here. And these 
mind-numbing discussions always remind me of Henry Jackson, our 
Senator, who once said what he was looking for was a one-armed 
economist so he wouldn't hear any more of this ``on the one 
hand this'' and ``on the other hand that.''
    And in the State of Washington I hired a guy in 1979, after 
we lost our bond rating and whatnot, to do our revenue 
estimates, because we always had a fight between the Governor's 
office and the legislature as to what the revenue was going to 
be. We finally said, let's get one guy and he would give us a 
high, a medium, and a low, and then we would pick one, and the 
Governor had to live with it and we had to live with it.
    Now, up here we keep playing this game of OMB and CBO and 
the Joint Committee on Tax and everybody else. It is all for 
political reasons. Groucho Marx probably said it best when he 
said, ``When you go into politics, the first thing you have to 
learn to do is to have a straight face.'' And we sit here and 
have these sober-faced discussions. But we know that we are 
never going to get a balanced budget because one group is going 
to say, if we do this, if we cut taxes, the revenue will go up. 
And another group will say, no, if you cut taxes, the revenue 
will go down. And we never agree on the baseline. And we fight. 
And we are going to come to a showdown here on the weekend, 
because people say we are in so much debt that we can't--what 
can we do? Well, it depends.
    But we don't have one definition of being in debt because 
we don't talk about the investment in infrastructure. We don't 
talk about a lot of things in some kind of unified system.
    My belief is that these discussions--the majority will 
decide what they think the estimate is. I think this hearing is 
probably about let's use some dynamic scoring so we can make 
things look better going into some kind of a tax reform 
discussion.
    I read, Mr. Buckley, your statement that if we accept some 
of these assumptions, we may have a negative effect on the 
market. Could you expand on that? We are sitting here today 
with the Republican leadership saying that we don't want 
Bernanke fiddling with the interest rates because it is going 
to--they don't want things to get better, that is pretty clear.
    Mr. BUCKLEY. Let me slightly respond to what Doug said. 
Businesses do use macroeconomic models in making business 
decisions. And that is exactly what I think this Committee 
should do. That is perfectly appropriate. But when they report 
to their shareholders, they record the cost without reduction 
for the potential gains that may result from the investment. If 
any business reflected in its current statements the 
prospective but uncertain benefits from its current 
investments, it would probably violate every securities law.
    So to say that business used these assumptions, that is 
correct, they do, in making business decisions. They do not use 
these assumptions when they report to shareholders. If the 
profits from the investment actually are realized, the business 
takes those profits and they will count in the year which they 
are realized. If you score using these estimates, you are 
saying that the Federal Government will take into account 
uncertain benefits before they are realized. I think that is 
pretty dangerous. I think it is dangerous as far as the 
acceptance of the market for cost assumptions.
    Mr. MCDERMOTT. What difference would it make to the market 
if you started taking those----
    Mr. BUCKLEY. If the markets suggested that you could pass 
big tax reductions and pretend that they had no cost because of 
uncertain projections of future macroeconomic benefits, they 
would not respect those decisions. There is a point where you 
need credibility in your budget assumptions. Those budget 
assumptions have credibility now because they are consistent 
with the cost accounting standards that businesses have to 
follow in their everyday life.
    Mr. MCDERMOTT. Can we have that as long as we have OMB and 
CBO fighting?
    Mr. BUCKLEY. But they are not making assumptions about the 
wisdom of the change in law. They are making microeconomic 
decisions about the effects on revenues.
    Chairman CAMP. The time is expired. Mr. Buchanan is 
recognized for 5 minutes.
    Mr. BUCHANAN. Thank you, Mr. Chairman, for holding this 
important hearing. I also want to thank all of our witnesses 
today.
    Mr. Eakin, I was curious. I want to talk about taxes and 
small business in a minute, but I was very interested to read 
your comment the other day on the Federal Reserve. I believe we 
need to audit the Fed. I have talked to a lot of people in 
Florida who are concerned about the Fed and their active 
involvement. What are your thoughts on whether the Fed should 
be more active or less active in terms of our policies?
    Mr. HOLTZ-EAKIN. I have no idea what I said. I talk too 
much, evidently.
    Mr. BUCHANAN. I heard your comments. I think it was along 
the lines that the Fed was too active. I just hear that comment 
a lot.
    Mr. HOLTZ-EAKIN. I don't think--there are multiple 
discussions about the Fed. Number one, I do not believe that 
there is much the Fed can do to enhance near-term economic 
growth at this point in time, and that doing nothing is 
essentially the right near-term situation in my view. They 
still have capacity to help us if, God forbid, European 
financial shocks or something get transmitted to the U.S. They 
can step in and help us on the downside. And I believe that I 
would prefer to have the Congress of the United States do 
appropriate oversight in hearing settings and make sure that 
the books are square. But I do not want the Congress of the 
United States running U.S. monetary policy. I have seen how the 
Congress produced fiscal policy, and I am not overwhelmed.
    Mr. BUCHANAN. The other thing I wanted to get on is small 
business. I know we all believe it is the backbone of our 
economy. It creates 70 percent of the jobs. And I see it in our 
communities that are concerned about taxes and where that is 
going. There is also the lack of credit out there.
    Mr. Barthold, in terms of your modeling, what have you 
taken into account in terms of pass-through entities? How do 
you look at that in terms of your modeling?
    Mr. BARTHOLD. Pass-through entities are part of our 
conventional modeling. And to the extent that the conventional 
modeling feeds into the macroeconomic analysis that we provide 
from time to time, pass-throughs are included. On the macro 
side, as I noted in the testimony and overview document, we 
don't divide the business sector into small businesses, medium 
businesses, and large businesses. We use a much more crude 
aggregation. Most of the time we are looking just at business 
investment and investment in housing.
    But in our conventional modeling, as I know you know from 
some material that we went through earlier in the year, we have 
a substantial amount of background data on the types and 
numbers and distribution of different entities--sole 
proprietorships, S Corporations, partnerships--by industry. And 
we use that data to analyze all the different proposals that 
Members such as yourself bring to us.
    Mr. BUCHANAN. A lot gets thrown around. I have been in 
business for myself for 30 years and been active with a lot of 
small businesses. I am concerned because a lot of times it gets 
thrown around about the idea that only 2 percent of small 
businesses are affected by the tax increases. But yet when you 
look at the income of these pass-through entities, 50 percent 
of the income is impacted.
    And when you look at the environment, especially in 
Florida, but I am sure other States, where you have a lack of 
credit, the growth and whatever success I had because I had 
strong banks that were able to back cheap capital, but when you 
take into account a lot of pass-through entities looking at 
their taxes are going to go up, along with a lack of capital, 
then we try to figure out why we don't have the job creation. 
That is what I am getting feedback on every day back in 
Florida. Do you have any thoughts about that?
    Mr. BARTHOLD. I think the issue that you are raising is 
very similar to the issue that Mr. Tiberi raised earlier, and 
that is; to what extent does current legislative uncertainty 
affect current business decisions, and then how is that 
reflected in the modeling? I noted that short-term uncertainty 
that is not picked up in the periodic updates of baseline 
projections of investment, macroeconomic activity, on business 
income, is missed in the process.
    Mr. BUCHANAN. Mr. Beach, do you have anything you want to 
add to that?
    Mr. BEACH. It is very important to do the pass-through 
entities correctly. In models that we use, we take a lot of 
time to take a look at which ones are most likely to be 
benefited by drops in capital cost because of the capital-
intensive nature of some of those pass-throughs, labor costs, 
because of that, and so forth. You need to have very detailed 
information.
    Fortunately, I can tell you that the Joint Committee does a 
pretty good job of sorting through that. I will also tell you 
that I think the Joint Committee would benefit tremendously by 
having more active participation of advisory panels, outside 
groups, that would come in and not oversee their work, but be 
at a place where they could try out new ideas and get 
suggestions. There are a lot of people in this town and around 
the country that are handling questions just like you have 
asked that are outside the Joint Committee.
    Mr. BUCHANAN. Thank you, Mr. Beach.
    I yield back.
    Chairman CAMP. Mr. Smith is recognized.
    Mr. SMITH. Thank you, Mr. Chairman, and thank you to the 
experts on the panel here today. I certainly want to be 
sensitive to the fact that there are a lot of moving parts in 
the economy. And I think I hear you saying that it is hard to 
predict everything. I am certainly sensitive to that. We are 
forced to--and I think it is healthy--to look even beyond the 
10-year window.
    Mr. Holtz-Eakin, do you think that we could use dynamic 
analysis perhaps to even look beyond the 10-year window?
    Mr. HOLTZ-EAKIN. I think it would be incredibly desirable 
to do that. You certainly want to always use all the 
information you can about the long-run consequences of both the 
tax and the spending policies of the government, there is no 
question. We have enormous long-run problems that the 10-year 
window doesn't capture right now. The only real issue is the 
degree to which you bring those into the formal scoring 
process. And that is the place where the Holtz-Eakin-Buckley 
feud shall continue.
    Can I respond to what he said? I think what he said is 
wrong. Can I respond?
    Under current procedures, the CBO and the OMB will put out 
a baseline projection in January. And those will be budget 
projections for the U.S. This Committee could then, in the 
middle of the year, pass a tax reform, under current 
procedures. When the next January came around, CBO and OMB 
would have to create new budget projections and they would have 
to look at the new current law and decide whether that tax 
reform helped growth or didn't.
    All we are talking about is whether during the year you 
actually use that information to decide among tax reforms. It 
is not going to change the integrity of the budget projections. 
The financial markets are not even going to notice.
    Mr. SMITH. Thank you.
    Mr. BUCKLEY. If I could have an opportunity. I am sorry; on 
your time, too.
    You are right, you keep doing changes in estimates. There 
is no way that the CBO estimate next year is going to be 
dramatically different by reason of a tax reform enacted this 
year. I don't think it is going to change the projections all 
that much. The real question is how you score it. If you score 
it in a way that hides the budget cost, I think you run into 
trouble. And particularly if you score it under assumptions 
that this Committee selects--and that is what Doug says you 
have to do--then I think you have real problems.
    I think it is different if CBO has a new baseline. I think 
it is a quite different thing from this Committee saying we 
shall assume that the Federal Reserve is going to accommodate 
this in this way; we shall assume this and we shall assume 
that. And therefore you would determine the score by the 
actions of this Committee. That is a political judgment that I 
think you are perfectly appropriate to make. I don't think it 
should affect the budget score.
    Mr. SMITH. Pardon me while I shift gears a little bit. I 
know that tax policy does have consequences in the economy. And 
I know that different States have different tax policies among 
themselves. And so I have seen where tax policy affects 
behavior. I think we can all agree on that to a certain point.
    Take, for example, section 1031 exchange policies that 
oftentimes encourage some behavior that impacts market values. 
And then a high property tax State like Nebraska sets property 
taxes according to market value, and all of a sudden tax policy 
can effectively influence and affect local tax policy--even the 
most local of taxes, being property tax. Is that taken into 
account in an analysis of any form right now?
    Mr. Barthold.
    Mr. BARTHOLD. Yes, Mr. Smith. There are a couple different 
avenues in which some of the State and local effects are taken 
into account. What we don't do is we don't project that there 
will be a change in the budgetary receipts in the State of 
Nebraska or in the State of Missouri. But we do as part of our 
individual modeling, for example, assign individuals to States. 
We have upgraded from time to time--in fact, just this last 
year, we added a State tax calculator--so that when we look at 
behavioral effects, we will be able to take into account the 
combined marginal tax rates of the Federal and State level. We 
also use that State tax calculator to look at possible itemized 
deductions for real estate property taxes and State and local 
income and/or sales taxes.
    So we do try to account for some of the interaction that is 
in the Federal system. But it doesn't go down to projecting 
budgetary outcomes for specific States.
    Mr. SMITH. And then how that might come back around and 
affect tax.
    Chairman CAMP. The time has expired. Mr. Neal is recognized 
for 5 minutes.
    Mr. NEAL. Mr. Chairman, thanks for holding this hearing. I 
often think that this is a part of congressional life that the 
public does not get to see, where there really is an exchange, 
and you listen to people who do this every day and there is 
good give-and-take, and the people that are at the witness 
table are not only seasoned but, just as importantly, I think, 
pretty honest about the arithmetic that is put in front of 
them. I appreciate it very much.
    I tortured Mr. Holtz-Eakin over the year with this 
question. And I see no reason that I should leave him alone 
today, on that basis. He knows where I am going with this. He 
already knows the answer and I know the answer to the question 
that I am going to raise with him. But I appreciated his 
candor.
    I was driving along one night listening to a lengthy NPR 
piece, and Mr. Holtz-Eakin was the subject of the interview. I 
thought the candor he expressed on the campaign trail was very 
helpful to the dialogue as well.
    Do you think tax cuts pay for themselves?
    Mr. HOLTZ-EAKIN. On average, no.
    Mr. NEAL. Thank you. Now I am going to come back to you for 
a second here, because I also want to question Mr. Buckley for 
a moment here.
    You were around during the Tax Reform Act of 1986. How do 
you realistically think that we can get to that 25 percent rate 
that is being shopped by many in this town at the moment?
    I want to give Mr. Holtz-Eakin a chance to speak to that as 
well.
    Mr. BUCKLEY. Unless you are willing to sustain a large net 
tax reduction--and that is clearly a question here--I doubt 
that you can get to 25 percent if you follow your normal 
practice of providing transition relief for people who have 
made investment decisions based on current law. For example, 
you can raise a lot of money by repealing the mortgage interest 
deduction. However, if you decide it is unfair to raise that--
repeal that deduction for people with existing mortgages, the 
amount of money you raise disappears rapidly.
    A lot of the numbers that are being used for tax reform 
debates so far are not revenue estimates. They are static tax 
expenditure estimates. If we are talking about purely static, 
tax expenditures estimates are static. So a lot of the 
estimates that people are using are static estimates. It will 
be estimated with behavioral responses; not macroeconomic 
responses, but behavioral responses.
    So I think it is very difficult to do, without being pretty 
rough, and not properly taking into account the investment 
decisions that people have made based on current law.
    Mr. NEAL. Mr. Holtz-Eakin.
    Mr. HOLTZ-EAKIN. I think qualitatively the key is that the 
Tax Code now subsidizes to a tremendous extent consumption 
items. The mortgage interest deduction is the consumption of 
debt to finance owner-occupied housing. The employer-sponsored 
insurance exclusion is the subsidization of the consumption of 
insurance and health products that it pays for. If you go 
through the list, by and large what we do with the Tax Code are 
things that subsidize what is the opposite to growth policy. It 
is consume now, forget about the future. So if you want to get 
rates down and you are serious about growth effects, you have 
to reform the Tax Code to reward saving and investment and to 
stop subsidizing consumption. And that is the only way you will 
get rates down. That points to the reason why it is very often 
the case that tax cuts don't pay for themselves and that 
analyses of tax policies don't show big growth effects, is 
because often it is not very good growth policy. Because a lot 
of tax policy simply is not.
    Mr. NEAL. Mr. Barthold, he just teed-up the question that I 
want to raise with you. Mr. Beach disagrees with the economic 
models you use as it relates to static estimates. Would you 
like to expound upon the testimony you offered based upon the 
models that you have offered today?
    Mr. BARTHOLD. Well, I just wanted to take issue with the 
word ``static,'' as I noted in my testimony and we noted in our 
background material, and as came up in the discussion of 
capital gains tax policy changes. We incorporate at the 
microeconomic level a substantial amount of behavioral 
response. We try to account for compliance behavior, portfolio 
changes, shifts between investment sectors, all in response to 
tax proposals that the Members offer to us for economic 
analysis.
    What we pointed out some today is that in macroeconomic 
work that we have tried to do for the Committee, we are 
presenting further economic analysis on how some policies might 
have broad effects on the economy in terms of labor supply and 
capital investment, how they could matter to future economic 
growth.
    Chairman CAMP. Thank you. Mr. Schock is recognized.
    Mr. SCHOCK. Thank you, Mr. Chairman. First, I would like 
your permission to submit questions in writing to these 
panelists so that they can respond in writing if I run out of 
time.
    Chairman CAMP. Without objection.
    Mr. SCHOCK. First, Mr. Holtz-Eakin, your response to tax 
cuts don't pay for themselves. I am curious, by my friends on 
the other side who keep pointing this out, I am wondering 
whether or not government spending to spur economic growth pays 
for itself.
    Mr. HOLTZ-EAKIN. Not in my view, no.
    Mr. SCHOCK. So when you said earlier that oftentimes 
cutting taxes is not an effective way of spurring economic 
growth, obviously we have tried to spend a lot of money here in 
Washington, D.C. to spur economic growth. Which of those two 
paths do you think is a better one to spur economic growth, if 
you can; and if not one of those two paths is better, is there 
a third that we are not seeing?
    Mr. HOLTZ-EAKIN. I think if you look at long-run growth, 
ignoring business cycles, unquestionably the preferred package, 
pro-growth tax reform, has the bigger impacts. I have little 
doubt about that. The debate over what happens in the short 
run--throw money at the economy, get Keynesian effects; cut 
taxes, get Keynesian effects--I think both have proven to be 
relatively inefficient and not something that we ought to get 
too high hopes of.
    I guess the biggest thing is have a discussion where how 
you cut taxes matters, not just do you cut taxes. How you spend 
money matters, not just do you spend money. There is a big 
difference between providing high-quality infrastructure over 
the long term and passing out cash benefits to American 
citizens.
    Mr. SCHOCK. Do you think that infrastructure spending 
matters if it is more long term and sustained? For example, a 
highway bill over 6 years versus a 1- or 2-year stimulus bill?
    Mr. HOLTZ-EAKIN. I have little faith in so-called 
infrastructure stimulus spending. This for decades has been a 
phantom that Congresses have tasted. It never arrives in time. 
It is often spent on bad projects. It is not good policy. There 
is no question that we need better infrastructure programs 
where we spend the money wisely. And I recommend to you a 
private sector commission report that I can get to you on 
reforming transportation infrastructure programs.
    Mr. SCHOCK. I would like that. Thank you.
    Mr. Barthold, we had a panel of company CEOs and CFOs 
before us on the issue of tax reform and I specifically asked 
them--many of them received different types of credits, 
deductions in our current Tax Code--whether or not, in fact, 
eliminating all those tax deductions and going to a straight, 
for example, 25 percent rate would be better for them. They 
unequivocally--all of them said yes. I then asked them whether 
or not, in fact, their business models would stay static or 
whether or not they would in fact invest more money in the 
United States. Most of these were multinational companies. 
Again, went down the line, Republican and Democrat witnesses 
alike, all uniformly said they would in fact invest more in the 
United States if we got rid of deductions and could get the 
rate close to 25 percent.
    That leads me to ask you specifically a question. And I 
will put it in writing so you can respond in writing, but maybe 
you can take a jab at it with the time that you have:
    First, whether the Joint Committee revenue estimating 
methodology would assume one or more of the following: First, 
that U.S. multinationals would increase the amount of their 
U.S. domestic investing by investing capital inside the U.S. 
that, under current law, would have been invested outside the 
U.S.
    Second, that the amount of foreign investment inside the 
U.S. would increase above what is expected under current law.
    Third, that less earnings stripping would occur with 
respect to foreign investment in the U.S. than occurs under 
current law.
    And fourth, would U.S. companies engage in less income 
shifting than occurs under current law?
    Mr. BARTHOLD. Well, I think I can give at least a short 
answer on that and I will be happy to give you a more detailed 
response in writing.
    You asked really about both sides of U.S. domestic 
investment in response to a corporate rate. First of all, we 
think, off course, it depends on what other tax policy changes 
are made. But if we are just saying lower corporate rate, that 
gives incentives for corporations to expand their business 
activities in the United States. So, yes, part of our modeling 
would show--particularly if we are talking about macroeconomic 
effects--we would show that U.S. investment by U.S.-based 
multinationals should increase.
    Similarly, it does make any investment by anyone in the 
United States more attractive. So we should expect also that 
the incentives would be for foreign-based multinational 
corporations also to expand their business activities in the 
United States.
    You asked about two aspects of income shifting for inbound 
investment by foreign persons. There is some evidence--it is 
mixed--of what is called earnings stripping. That is because of 
the ability to deduct at a relatively high statutory tax rate 
against the U.S. base and report that income abroad with a 
lower statutory tax rate. Again, the incentive would be for 
less earnings stripping.
    On the flip side, for outbound investment or activities to 
try to locate U.S. multinational income abroad rather than in 
the United States, the incentive would also be to retain more 
of that income in the United States.
    Chairman CAMP. Thank you. Mr. Becerra is recognized.
    Mr. BECERRA. Thank you, Mr. Chairman. Thank you, gentlemen, 
for your testimony.
    Mr. Barthold, from what I can gather, trying to work 
through all the economic-speak, this is like trying to ride a 
bucking bronco when you are trying to come up with a good 
score. In the modeling that is done and that has been 
traditionally done, have you all developed a sense of the 
variables that you can include in this equation to give you 
your score that you have the most confidence in helping you 
come out with a result that reflects reality?
    Mr. BARTHOLD. Mr. Becerra, the interesting question that 
you raise, it is really about the level of uncertainty that 
there would be to different aspects of our modeling--different 
aspects in proposals that Members might create for us to think 
about. As Doug had mentioned before, there are some areas that 
are well known and well tried and relatively well understood. 
There are other areas also where there is lots of good data and 
the outcomes seem quite clear. And then there are some where we 
are really in very much the realm of the brand new and the 
unknown.
    As an example of something that is well known, well 
understood, good data, one policy that has been changed from 
time to time by this Committee has been to adjust the value of 
the standard deduction and the personal exemption. We feel 
really, really good about our estimates on that; one, because 
there are not huge behavioral responses from those sorts of 
changes. The numbers are quite clear. It is a well-understood 
area, with lots of good data.
    Mr. BECERRA. So have you a higher degree of confidence with 
some of the variables that you have in this equation than 
others?
    Mr. BARTHOLD. That is definitely the case.
    Mr. BECERRA. I assume as we move forward, the more data you 
collect, the greater your ability to know if you feel confident 
about tweaking a particular variable or adding or subtracting a 
variable.
    Mr. BARTHOLD. I will just leave it as that is so.
    Mr. BECERRA. To the degree that economics is a science and 
to the degree that your modeling and CBO's modeling to come up 
with a score, an assessment, can be characterized as a science, 
we are essentially making some very good educated guesses about 
what we think the very fluid and dynamic economy will do if we 
tweak it here or there, based on a policy change in law.
    Mr. BARTHOLD. To the extent that estimates are guesses, 
what you say is correct. Our models are empirically-based 
models. So where there is better data, where there has been 
more testing of the data, more similar sorts of policy changes 
in the past, we have better confidence about the estimates that 
we make for those policies than when we are starting with 
something brand new and where there is limited data.
    Mr. BECERRA. Let's put aside for a moment this unresolved 
question of whether tax changes can produce measurable 
macroeconomic effects.
    Mr. Buckley, let me ask you a question. Is there a constant 
relationship between GDP growth and jobs?
    Mr. BUCKLEY. You probably are asking the wrong person on 
the panel. My guess is there is; that the greater economic 
growth, the greater job growth, since labor is such a large 
part of our economy.
    Mr. BECERRA. And, Tom, maybe that should have been directed 
first to you, and then let me go back to Mr. Buckley, because I 
wanted to ask Mr. Buckley a question. But to the degree you 
think there is an answer, is there a constant relationship 
between GDP growth and jobs?
    Mr. BARTHOLD. There is a positive relationship. If you mean 
constant, if I could say for every $50,000 increase in GDP, 
that that represents half of a job or one job, there is going 
to be variability because it depends on what sector is growing 
and what sector is producing the GDP. But as a general matter, 
real economic growth means greater job opportunities. In 
particular, it means greater income for individuals.
    Mr. BECERRA. And different economic growth policies could 
have different job consequences.
    Mr. BARTHOLD. That is certainly the case.
    Mr. BECERRA. So, Mr. Buckley, looking at it from the other 
end, would a budget score in and of itself tell policymakers 
about the loss of jobs?
    Chairman CAMP. I am afraid time is expired, Mr. Buckley. If 
you want to respond in writing, that would be fine.
    [Information not provided.]
    Chairman CAMP. Ms. Jenkins is recognized.
    Ms. JENKINS. Thank you, Mr. Chairman. Thank you all for 
being here.
    I would like to follow up where Congressman Schock left off 
on the international front, maybe for each of you to comment, 
because we all know the U.S. economy is a whole lot more global 
today and many experts tell us that our Tax Code hasn't kept 
pace with the globalization. And one option would be to move 
American companies toward a more territorial style tax system.
    So, a couple of questions. If we would make that change, 
are the models available and capable of accurately estimating 
the impact of this change on economic growth and investment 
decisions? If not, do they need to be updated to estimate the 
impact on the economy of bringing our international rules more 
in line with that of the rest of the world?
    Mr. BARTHOLD. Thank you, Ms. Jenkins. Within our 
conventional estimates I had noted in my testimony that we use 
a fixed GNP as opposed to GDP as the baseline assumption, GNP 
being the measure of income which can be earned by U.S. people 
either abroad or in the United States. So within our 
conventional estimates we model some cross-border investment 
flows of U.S. taxpayers.
    Now, what we don't do in the conventional estimates is then 
incorporate possible effects from those flows on domestic 
productivity and ultimately domestic employment and second-
round macroeconomic income growth. I pointed out in my 
testimony that our MEG model actually does incorporate cross-
border flows from foreign and U.S. investors, and that as 
investment flows, that has effects on productivity, and 
ultimately increased employment. The MEG model assumes that 
domestic and foreign investment responds to after-tax returns. 
So in assessing a proposal that might involve territorial 
concepts--more territorial concepts as opposed to worldwide 
concepts, that would be part of how we analyze that for 
macroeconomic purposes.
    Some things that are not in our modeling, one feature that 
would be important ultimately, is if the United States does 
something, what does the rest of the world do? We do not model 
what the rest of the world does. That is a hard one to guess in 
any event.
    And I should note that--one of the work projects that I 
noted is we are trying to upgrade our overlapping generations 
model, which gives some alternative sensitivity for Members. We 
are trying to upgrade that to more explicitly model cross-
border flows. Right now the cross-border features are only 
reflected in net interest rate changes.
    Ms. JENKINS. Okay. Thank you.
    Any thoughts, comments?
    Mr. HOLTZ-EAKIN. I would defer to Mr. Beach, who actually 
has a model, and ask how he does it.
    Mr. BEACH. Congresswoman, thanks for that question. I would 
refer you and the Members of the Committee to the analysis that 
we did of the Wyden-Gregg/Coats bill, where a much lower 
corporate rate was introduced, down to 25 percent. We had 
territoriality. We had major economic effects coming from the 
rest of the world. You can look at that. I am very impressed. I 
was part of the team that helped build the MEG model. The MEG 
model has great capabilities for doing these things. The 
research program you just heard of was very good.
    With respect to how we handle the rest of the world, when 
our tax rate goes down, as you well know, the rest of the world 
tries to follow. And we use Ray Fair's model out of Yale 
University, which is available at no cost on the Internet. It 
is a very fine model. And it has a well-articulated set of 57 
countries that interact with whatever policy changes you 
introduce.
    Ms. JENKINS. Thank you all. I yield back.
    Chairman CAMP. Thank you. Mr. Paulsen is recognized.
    Mr. PAULSEN. Thank you, Mr. Chairman.
    Let me just start out, because several of you have 
commented or made comments regarding how the economic models 
handle budget deficits and how that debt is a very important 
factor in determining or understanding the model's result. If 
the Committee really wants to get an accurate picture, an 
accurate understanding of the potential benefits of tax reform, 
as accurate a picture as possible, how do you recommend that we 
address this issue overall?
    Mr. Barthold.
    Mr. BARTHOLD. I think that is probably more of a question 
for my colleagues on the panel. Our modeling does reflect the 
fact that increased budget deficits can crowd out private 
capital formation. But how to address the policy issues are the 
Members' call.
    Mr. PAULSEN. Mr. Holtz-Eakin.
    Mr. HOLTZ-EAKIN. Mechanically, what I would do is isolate 
the impact of current tax policy versus the reform policy. And 
to do that, first go to the spending side and at least in a 
computer, if not in the real world, fix Social Security, fix 
Medicare, fix Medicaid. Do the big transfer programs on the 
spending side that are the budget problem, so that over the 
long term the debt to GDP ratio is stabilized, not exploding. 
Now you have a stable spending policy, and enact a tax reform 
and look at the difference between those two scenarios. That is 
the benefits of tax reform, isolated.
    Mr. BUCKLEY. I would slightly disagree. We have increasing 
debt not just simply because of the spending side. We have one 
of the lowest tax burdens of any developed country in the 
world. Our taxes now are approximately 15 percent of GDP--our 
Federal taxes--which are really very low, historically. It is 
hard to run a government with a large defense budget and other 
needs like that with a revenue base that low. Sustained 
deficits do affect, I believe, long-term economic growth. And 
they have to be handled. I do think you can't get there only on 
the spending side. You have to adjust revenues as well.
    Mr. BEACH. The first thing I would do is avail yourself of 
the good work that the CBO and Congressional Research Service 
is saying in illustrating how crowding out works. Crowding out 
is kind of a ham-fisted approach to understanding the deficit, 
because ultimately it is the composition of the deficit and the 
drivers that you need to understand best. Many of you probably 
sit on the Subcommittee dealing with health care, and of course 
health care is driving so much of this deficit. So ask for 
analysis that decomposes the drivers of the deficit. And then 
as we reform those drivers, you will see that that has a 
positive effect on the economy through prices and through 
competition and through the better allocation of resources, 
particularly capital resources.
    And in our modeling--and I would be happy to share this 
with you--we have done that kind of work, got in, looked at the 
compositional things, reformed those; and then from the 
spending side, absent a tax change, we see greater efficiencies 
in the economy just because resources are better used.
    Mr. PAULSEN. I think one thing that is very interesting is 
I talked to several corporations--and this has not been in 
testimony here--but how do you use your own projections for 
your own company and allocation of capital? And a good number 
of them use dynamic scoring or macroeconomic policy as well 
themselves as they look to moving forward.
    Let me just ask this, Mr. Beach. I will just start with 
you. When choosing between different tax reform options--we 
kind of laid into this a little bit--which types of policies 
are going to be the most effective or the most likely to 
produce the dynamic long-term growth that everyone is sort of 
looking for or hungering for or wanting right now? Are they the 
policies that kind of give the one-term benefit for a jump 
start, or is it more the policies that provide the long-term 
sustainable low tax rates, rates for taxpayers for a long time?
    Mr. BEACH. Well, as fiduciaries of the revenues of the 
fiscal situation of the United States, you are going to want to 
look at the long term. And that also is the right answer for 
the economy as well. So keeping tax rates low, low relative to 
other countries, making sure that you are raising enough 
revenue for your needed services or government, that is the 
basic thing, make sure there are as little as possible 
expenditures, subsidies, going through the Tax Code. That is 
better done on the spending side. And then that just releases 
the private sector to lead the economy to higher levels of 
growth.
    Mr. PAULSEN. Thank you, Mr. Chair, I yield back.
    Chairman CAMP. Thank you. Mr. Stark is recognized.
    Mr. STARK. Thank you, Mr. Chairman. Thank you for your 
patience.
    We will hear from our colleagues across the aisle that 
cutting taxes and cutting spending and shrinking the role of 
government leads to growth. I guess that leads to the 
conclusion that our economy would be better off if we 
eliminated all regulation, and 
the safety nets, and the military, and sort of end up looking 
like Somalia.
    But assuming that we won't go that far, I wonder, Mr. 
Buckley, if you could tell me--and I am somewhat confused by 
this issue of dynamic analysis and static analysis. If the 
Republicans were successful in following their plan to 
eliminate Social Security and eliminate Medicare, what would be 
the difference if you scored that dynamically or statically?
    Mr. BUCKLEY. Well, if you eliminated those programs, you 
would see large nominal reductions in spending.
    Mr. STARK. Nominal.
    Mr. BUCKLEY. Nominal. I would guess that dislocations would 
be so severe that you would see real economic effects that 
would be negative. Medicare is a large part of the health care 
sector in the economy. Social Security is the primary income 
support for the elderly. Eliminating those two things, which I 
am fairly confident nobody is talking about----
    Mr. STARK. Oh, yes, they are.
    Mr. BUCKLEY. Well, let me put it this way. I would hope no 
one is talking about it, because it would have very serious 
consequences, put the economy and the safety net back to pre-
Depression times where things were not as good as they are 
today.
    Mr. STARK. Wouldn't make a difference if you scored that 
dynamically or statically, we would still be in deep trouble?
    Mr. BUCKLEY. This is where I don't think the models are 
very good--they would probably treat that as positive because 
it removes these government distortions from the economy. It 
would create really serious economic consequences. I mean, 
homelessness and hunger are pretty stark economic incentives. I 
am not so certain if you follow some of these models you 
wouldn't get a projection of a positive impact here. And that 
is why I think so many of these models are just at their base 
wrong, and they have not proved to be very accurate.
    Mr. STARK. Thank you very much. I yield back, Mr. Chairman.
    Chairman CAMP. All right. Mr. Marchant is recognized.
    Mr. MARCHANT. Thank you, Mr. Chairman.
    So far we have heard from you how macroeconomic models have 
seen some limited use by the Joint Committee on Taxation and 
CBO. I am interested in hearing from you about the extent to 
which other Federal Government agencies, or even other 
governments such as the States, have used dynamic models to 
evaluate policy options.
    Mr. Holtz-Eakin and Mr. Beach, how have they overcome some 
of the concerns that we have heard about today about dynamic 
scoring?
    Mr. HOLTZ-EAKIN. Well, I know from personal experience that 
the U.S. Treasury and the White House Council of Economic 
Advisors have at times used these kinds of modeling efforts to 
understand the impacts of policies and ultimately the budgetary 
impacts. Some of those are in the public domain and you could 
look at them.
    When I was at Syracuse University, I was on the Tax Study 
Commission for the State of New York, and I was on the Ways and 
Means Advisory Board for revenue forecasting purposes. And we 
regularly used models of this sort which at the State level 
included a fairly serious scrub of cross-State influences; 
could New York State influence what was then largely the 
outbound exodus of businesses, slow it down? And also these 
tough issues on capital gains and bonuses, because an enormous 
part of the New York State revenue was driven by the taxation 
of Wall Street incomes.
    So I think there is a wealth of experience. I couldn't 
pretend to summarize all the other States, but this is not new 
territory. There are places that have undertaken to do this 
both for purposes of accuracy and because their revenue streams 
sort of demand that they understand it better.
    Mr. MARCHANT. Mr. Beach.
    Mr. BEACH. Yes, it is the case that macroeconomic models 
play a prominent role in many of the Federal agencies as matter 
of their routine work. For example, the Energy Department, 
through the Energy Information Agency, on a quarterly basis 
runs the global insight macroeconomic model, which is the big 
one, that is the one Heritage uses and the one most of the 
Fortune 500 companies use to develop their quarterly forecast 
of energy use in this country, and also it is important for the 
budgeting of the Energy Department and a lot of the programs 
that you run through the Tax Code. The Treasury does that. Doug 
has mentioned it.
    I also mention the CBO, under Doug Holtz-Eakin, has vastly 
increased the number of models which were used. They use eight, 
nine models right now, and that is wonderful.
    The Agriculture Department is famous for its use of macro 
modeling and has been using those models now for almost 30 
years to look at ag programs at the local level.
    I wrote an article not too long ago in which I called every 
State in the country to find out what their modeling practices 
were, and found 11 States--the big ones, California, New York, 
and others--using macroeconomic models to advise the 
legislature on spending programs and on tax policy changes. And 
in the case of about half of those States required when doing 
the revenue estimate--I was chief economist for the Sprint 
Corporation, and I would like to echo, just to say we used 
macroeconomic models all the time to look at the various ways 
in which public policy would affect our company. And we were a 
large enough company that sometimes we would actually affect 
the outcomes for certain parts of the economy.
    So it is in widespread use. I tell you, I will say this in 
just a second or two, I have been working, giving dynamic 
modeling up here at the Federal level for a long time, and you 
folks are moving way closer to the goal than you may even 
sense. Since it is now in such widespread use, we need to get 
the Joint Committee actively engaged in it to the extent that 
these other agencies are as well.
    Mr. MARCHANT. I have one more question to Mr. Barthold. Are 
there studies that the Joint Committee on Taxation have on hand 
that show what effect a consumption tax versus an income tax 
would have on the gross domestic product?
    Mr. BARTHOLD. In the mid-1990s we started doing some 
macroeconomic analysis and studying how to incorporate our 
detailed conventional modeling, the results of that that I 
described, into larger macroeconomics models. The first part of 
that was to look at broad tax reform of replacing income taxes 
with consumption taxes.
    So one place to look is on our Web site. There are the 
results of the symposium that we held with a number of outside 
modelers who looked precisely as replacing income tax with a 
consumption tax. But more generally, there are a large number 
of academics who have published work on that subject.
    Chairman CAMP. Mr. Berg is recognized.
    Mr. BERG. Thank you, Mr. Chairman. I really enjoy this 
hearing. And in North Dakota, we have dynamic analysis but we 
call it something different in our tax policy; we call it 
common sense. We have lowered our income tax, our corporate 
income tax and property tax this last year. Some of those, it 
is the third time we have lowered them in the last 10 years. We 
have seen the exact reality of that. We have a little over 3 
percent unemployment rate, we have a substantial amount of our 
State's budget in cash, we are short on workers, we have a lot 
of jobs that are unfilled.
    When I was back home on Sunday, there were eight pages in 
our local newspaper of employers looking for employees. So 
again, I just think when we talk about the dynamic analysis, 
the more information that we can have, I mean just the better 
decisions it will make.
    So as I was sitting here I was thinking, looking back--
maybe this was for the Joint Tax, Mr. Barthold--were there some 
periods in the last 20 years that we just looked at tax policy 
totally statically, and even though we knew it would have 
different effects we didn't put that into the scoring? Is there 
a thing we can look at, again in the past, that says if we used 
dynamic modeling we would have been much more accurate than we 
were? Any examples that stand out?
    Mr. BARTHOLD. Let me try and answer that in a slightly 
different direction, Mr. Berg. I hope this is responsive. We 
reevaluate estimates in our models all the time in the course 
of upgrading to try to improve the information that we provide 
to the Members. And so as the models incorporate empirically-
based outcomes from the 1990s, we use that as information for 
how we analyze things now--recognizing that the 1990s were a 
different time from now. But in terms of looking at a 
behavioral response by taxpayers, looking at shifting of 
investments across sectors and responsiveness by businesses, 
that is important data for us.
    If you are asking are there important big estimates that we 
got wrong, I am sure there are. But I would like to think about 
them and maybe respond at another time. I don't want to admit 
to any, offhand in a public hearing, if that is fair.
    Mr. BERG. That is very fair. In fact, we may follow up on 
that in writing.
    Mr. BARTHOLD. I would be happy to, Mr. Berg.
    Mr. HOLTZ-EAKIN. Briefly, I think there are some lessons, 
and I want to first of all emphasize there has never been 
static analysis, not at the Joint Committee, not at the CBO. 
The question is whether you take macrogrowth effects into 
account or not. There are all sorts of behavioral responses 
that are modeled.
    In 2003 when I was at CBO, we did an analysis of the 
President's budget proposals, a comprehensive macroeconomic 
impact, and that included the 2003 tax cuts, the JGTRRA that 
came up earlier, and it also included the Medicare 
Modernization Act, $400 billion of subsidized consumption. And 
when we did the analysis, what we saw was overall modest 
impacts of both those things.
    My conclusion was that if you undertake a radical policy of 
subsidized consumption, it offsets the beneficial growth 
effects of tax policy, and that is the lesson. Everyone else's 
conclusion was I did the analysis wrong.
    The point of this is that we would have been wrong if we 
just looked at the tax cuts in isolation, because other policy 
negated the impact. That happens a lot with the Joint 
Committee. There is a lot going on out there. It is not just 
macroeconomic uncertainty in other countries. There are also 
other policies that go on that impact ultimately receipts. And 
getting it wrong isn't really the metric of whether the 
analysis was done right. There is a lot going on that makes 
these estimates uncertain.
    Mr. BERG. Thank you. As long as you are all here, one last 
question I had is on the capital gains tax. It seems like that 
is getting a lot of press today at 15 percent. Just quickly: 
Will increasing that capital gains tax--again, it is on capital 
that already in my opinion has been taxed once--is there any 
model that would show that would encourage growth if that 
number goes up?
    Mr. BARTHOLD. Well, Mr. Berg, I think we touched upon this 
a little bit before. As you know, under the baseline, the 
maximum rate on capital gains will increase to 20 percent after 
2012. That is already accounted for in terms of baseline 
receipts.
    Your question about growth is what is the overall effect of 
taxing the return to saving and of the increased rate on 
capital gains and changes in tax rate on dividends, other--the 
ordinary tax rates on interest income all go into our modeling 
when we do macroanalysis of what would be the effect on the 
macroeconomy.
    Mr. BERG. I yield back, Mr. Chairman.
    Chairman CAMP. Mr. Pascrell is recognized.
    Mr. PASCRELL. Thank you, Mr. Chairman, and to our 
distinguished panelists. I am very, very hesitant to listen to 
people who were part of waltzing us through the last 10 years 
of economic issues. Mort Kondracke, certainly no liberal by any 
extent, said in discussing the tax cuts in February 2003, after 
the tax cut in 2001, that this is a wild ride Mr. Bush has set 
in motion. When it is over, we will know a lot, a lot about 
economics. We will either be a lot richer as a country, or in 
disastrous shape. The credit or blame will belong to the 
President. Now that is what he said in 2003.
    Followed by what Mr. Tom DeLay said: The jobs and growth 
package will not only grow the national economy--whatever 
models we are talking about, Mr. Chairman--but through that 
growth, it will help us support and fund the war on terror and 
other priorities for years to come. The American people 
understand the relationship between the war on terror and 
economic recovery, et cetera, et cetera. And here we are.
    Now in the last 18 months, we have seen the addition of 
about 2.2, 2.4 million private jobs that have been added to the 
economy. Yet we go back over the 8 years, and this is not 
pointing blame, because both parties--neither party is privy to 
virtue on the subject of where we are economically. So please 
know where I am coming from.
    It seems to me we need a more eclectic view when we talk 
about models, that no one model suits this, particularly 
because of what you said, Mr. Eakin, there are other factors 
involved. You cannot just cut taxes and think jobs are going to 
be created. That certainly did not happen in the 2001 and 2003 
tax cut, until 2005 when we had a little bit more private 
sector jobs. There are a lot of factors involved.
    So people who say all we need to do is cut taxes or all you 
need to do is cut social programs and we will have Nirvana, 
that is certainly no model that we could adhere to at this 
particular point. I don't think anybody on the panel would 
support that.
    So these are a lot more complex than we think, and you 
folks have been pointing that out very nicely.
    I have a question for you, Mr. Eakin, and then I would like 
to turn to Mr. Buckley on the same question. In your opinion, 
how does a statutory rate influence--because we have been 
talking a lot about this--influence a company's decision to 
create jobs versus an effective tax rate?
    Mr. HOLTZ-EAKIN. Well, certainly companies are going to 
operate on effective marginal tax rates at the margin. They are 
going to look at the overall consequences of the Tax Code for 
their net gain from adding a worker. That is the key. Statutory 
will be embedded in there, but it might not summarize it 
entirely.
    Mr. PASCRELL. Will they think of other things besides the 
tax rate that would go into their decision in determining how 
they would grow, how they would hire people, how they would not 
hire people?
    Mr. HOLTZ-EAKIN. Certainly. As this Committee is well 
aware, the Tax Code is an exceedingly complex animal with 
statutory rates, all sorts of deviations from the base----
    Mr. PASCRELL. Mr. Beach.
    Mr. HOLTZ-EAKIN. Deductions, depreciation, the whole thing.
    Mr. PASCRELL. Thank you. Mr. Beach.
    Mr. BEACH. Yes. The marginal tax rate is one of a spectrum 
of issues which go into determining the hurdle rate. Every 
chief financial officer has a hurdle rate in place in their 
mind, the Committee does as well, for making an investment. So 
you have a lot of things that go into that.
    I will point out that the marginal tax rate, the effective 
marginal tax rate is one of the major ones because it varies, 
it goes up and down and it is very large. So doing that is 
important.
    Mr. PASCRELL. Mr. Buckley.
    Mr. BUCKLEY. I believe it is the effective corporate tax 
rate that is important. Our statutory rates are relatively high 
compared to other countries. Our effective tax rates are not, 
because we provide more generous depreciation benefits.
    Mr. PASCRELL. It has to be part of the discussion.
    Mr. BUCKLEY. That is correct. That is one of the real 
questions on tax reform. If you do eliminate accelerated 
depreciation, you do kind of shift the tax burden onto those 
sectors that rely on that for their major incentive.
    Mr. PASCRELL. That is absolutely true.
    Chairman CAMP. Mr. Reed is recognized.
    Mr. PASCRELL. Is that it?
    Chairman CAMP. Time is expired, yes. Mr. Reed.
    Mr. REED. Thank you, Mr. Chairman. I enjoyed the testimony 
today. It is very enlightening trying to get an understanding, 
not being familiar with the world that you live in in 
macroeconomic forecasting.
    From a historical point of view in judging it from forecast 
and then as a result of actual numbers that were produced, is 
there any one model that stands out as one that has been very--
more accurate than other ones? If anyone would care to--you 
have a slew of them here in your testimony as different models. 
Is there one that stands out amongst you as scholars in this 
area?
    Mr. BEACH. Let me take a quick stab at that, because the 
field of models that are commercially provided is a good field 
to look at. After all, the Fortune 500 companies are kind of 
picky, they want to make sure the models they pick are the ones 
that are the most accurate and have been over the course of 
time.
    And without doing an advertisement for my company, I very 
much like the global insight model. It is a combination of all 
of the old models put back together into one. It is the one 
that is sitting out there in almost everybody's portfolio of 
models. And then I must say, then you must go on to develop the 
models that are best suited for your companies, a standard off-
the-shelf one. That is why the MEG model was such a 
breakthrough for the Joint Committee on Taxation because it is 
a great model. John Diamond's overlapping generations model 
that you heard about today--you haven't heard John's name, but 
it is in widespread use throughout this town. It is getting a 
lot of attention and a lot of auditing. That is another one 
that is rising to the top as one of the best models. It isn't 
rocket science to pick these models. There are only a few out 
there that are any good.
    Mr. REED. Okay. Mr. Barthold, anything you want to add to 
that from your opinion?
    Mr. BARTHOLD. I just wanted to make one point. The Joint 
Committee staff does not make macroeconomic forecasts per se. 
We do modeling to provide information to the Members about 
possi- 
ble outcomes from the policies that they are exploring. I 
wouldn't really be in a good position to endorse private sector 
enterprises.
    Mr. BEACH. One other thing, Mr. Reed. I forgot to mention 
this. The macroeconomic advisor's model out of Saint Louis is 
also an extraordinarily good model, and it was that model that 
was the basis for the MEG model. So you already have a well-
respected commercial model. It is not identical to MEG by any 
means, but it is kind of the architecture.
    Mr. REED. A good source, okay.
    And then other countries that are dealing with these issues 
and trying to forecast out their tax policy implications, is 
there any one country we could look to in our office as kind of 
a benchmark to identify and maybe learn something from what 
they do differently from what we do?
    Mr. Beach.
    Mr. BEACH. Good science is being done by the OECD more and 
more. You can go down the block to the World Bank and they are 
making significant advances in here. A lot of countries have 
very poor practices actually with respect to modeling. And so 
there aren't a lot that you can look to. The Germans have done 
a decent job, but I would look rather to the international 
organizations and to practices of the States that we have 
mentioned here today.
    Mr. REED. That we talked about earlier.
    Thank you, Mr. Chairman, I don't have anything further.
    Chairman CAMP. Thank you. Dr. Boustany is recognized.
    Mr. BOUSTANY. Thank you, Mr. Chairman. I would like to 
explore the limitations of models using a specific example. 
Over the past 3 years and now in the President's current 
proposal, he has repeal of certain expensing measures for oil 
and gas companies that would hit predominantly independent 
companies, smaller companies, not the integrated, large 
ExxonMobils or Chevrons or those types of companies.
    The most prominent of these is the repeal of the intangible 
drilling costs. And again, these are measures in a capital-
intensive endeavor where you can expense where the return--if 
you get a return, it is on the back end. And in talking to a 
lot of companies they are telling me that if these things are 
repealed, we will end up seeing a lot less of this type of 
activity by these companies. Consistently, the scoring of these 
measures as a package yields about 45 billion in revenue.
    I want to question that figure based on the modeling, and 
here is why. If you reduce independent companies' production of 
oil and gas, you are going to--it seems to me you are actually 
going to lead to a decrease--well, certainly a decrease in 
activity and decrease in revenue emanating from it.
    And so I guess my question is: How did that $45 billion 
come into--how was it derived? Were certain behavioral 
considerations taken into effect based on interviews or 
discussion from what would really happen here? And was there a 
consideration that we now have a delinkage between the price of 
oil and the price of natural gas in this country--well 
globally, for that matter, but predominantly in this country 
because it is more pronounced here than it is globally?
    Given the natural gas production, 97 percent of it is done 
domestically. It is done by small, independent companies. I 
have heard anecdotal information that suggested a company that 
might drill 15 wells perhaps would only drill two, or one, if 
the expensing provisions were repealed. So I want to explore 
some of these aspects and how they fit into the limitations 
that these models predict.
    Mr. Barthold, if you would start.
    Mr. BARTHOLD. Thank you, Mr. Boustany. The question that 
rises is obviously an important one to that particular sector 
of the economy. The oil and gas industry is a big component of 
the economy, and that is the main factor behind the scale of 
the estimate that we produced.
    But as I noted in my testimony we assume--we take into 
account--I shouldn't say we assume--we take into account that 
if we change the tax treatment of one sector, that there will 
be less economic activity in that sector. Now that economic 
activity, though, isn't necessarily lost to the economy as a 
whole.
    Now, unfortunately, I assume there are some of your 
constituents that you have talked to, the independent drillers 
of gas, they would go out and seek their funding from Doug 
Holtz-Eakin or John Buckley. And a Doug and a John would look 
and say, ``Gee, because of this tax change, the returns don't 
look so good; I don't want to finance your gas venture.'' They 
may turn to the film industry or they may turn to the micro-
processor industry and invest their funds there.
    So the investment isn't necessarily a loss to the economy. 
And our conventional modeling always tries to account for some 
shifting across sectors. So the model, yes, does recognize 
there will be less investment in oil and gas. We have done work 
to recognize the point that you made that oil and gas are 
different. They are different in international trade, and that 
can be an important factor in terms of displacement of domestic 
activity, and for foreign activity, the ability or inability to 
transport gas across the ocean. It is growing, but it is much 
more limited than the oil industry. All those factors we do try 
and take into account, sir.
    Mr. BOUSTANY. Thank you. Mr. Holtz-Eakin would you like to 
comment, or Mr. Beach?
    Mr. BEACH. I would add one thing, and that is even though 
it is true that investment dollars may flow to another sector 
and thus benefit that sector, there are sectors of the economy, 
once you degrade the capital structure, that are very difficult 
to rebuild. The transmission system, the production system, and 
the refining system associated with natural gas and petroleum 
must be continuously revitalized in order to keep them at their 
highest level of productivity and return.
    So changes in tax policy that you make for an industry must 
be taken with great care to think about the long-term 
consequences of that act. For example, in a model of the 
economy, we would have to treat it that way.
    Mr. BOUSTANY. Thank you.
    Chairman CAMP. Ms. Black is recognized.
    Mrs. BLACK. Thank you, Mr. Chairman, and thank you, panel, 
for being here today with this really complicated issue.
    I want to return to the issue of the corporate taxes and 
ask if there are any models out there that assume the burden of 
the corporate tax where they assume in the economy? Did they 
assume it on the company, the shareholder, or the consumer? And 
does this impact the model's results? Each one of you address 
that, please.
    Mr. BARTHOLD. Ms. Black, that is another important 
question. The most basic answer is we always assume that taxes 
are borne by individuals. The question you are asking is what 
is the incidence of the corporate tax or, more generally, what 
is the incidence of all the taxes that we have on capital? In 
the case of the corporate tax, is it borne by domestic 
shareholders, is it borne by domestic labor or a combination of 
the two?
    Economics literature is divided on this. There has been 
change through time. The ability of capital to flow across 
borders leads a number of people to conclude that there can be 
substantial shifting onto labor. There is not uniform consensus 
on that. The corporate tax affects the after-tax rate of return 
ultimately to investors. That is a factor that goes into our 
modeling, and our modeling is ultimately about individuals.
    Mrs. BLACK. Others want to address that?
    Mr. HOLTZ-EAKIN. I simply want to concur with what Mr. 
Barthold just said. This is how the economics professional 
handles this. There has been evolution over time in their 
perception of who ultimately bears the burden of this tax, with 
it shifting more and more toward labor as opposed to owners of 
domestic capital.
    Mr. BUCKLEY. I would say there is a sharp distinction 
between the corporate executives and economic models as to who 
bears the incidence of the tax. The executives believe that 
they and their shareholder bear the burden. So there is a 
difference of opinion here between the more technical economic 
analysis where it may be assumed to be borne by different 
factors, and what I have seen, just from the basic reaction of 
the corporate executives, where they are quite confident it is 
borne by their shareholders.
    Mrs. BLACK. Mr. Holtz-Eakin.
    Mr. HOLTZ-EAKIN. I think there is unanimity that corpora- 
tions respond to the corporate tax. I mean, they will rearrange 
their financial policies and they will alter their capital 
investment decisions. They will change the location of 
expansions. All of 
that is part of the transmission mechanism by which the tax 
gets shifted somewhere in the economy. And if they turn out to 
be less productive and less able to pay high wages, labor ends 
up bearing that burden. That is the mechanism.
    Mr. BEACH. Well, the corporate tax is borne by labor. That 
is the way we handle it in our model. That is the bearing of 
the tax. It goes to an individual. The effect of the tax, of 
course, is widespread. So depending upon the corporate 
strategies that are changed by the change in your tax policy 
here, you can see wages, standard of living for a lot of people 
who are affected in the private sector, the revenues of State 
and local governments. So it permeates throughout the whole 
economy. There are the effects and then there is the 
economically, theoretically-driven notion of bearing.
    So for your deliberations I would always think about the 
taxes borne by labor and the taxes borne by capital, and then 
think about the corporate tax and which of those does it really 
affect most? In our view, it mostly affects the amount and the 
compensation of labor.
    Mrs. BLACK. Well, it seems ultimately it will be borne by 
individuals as they purchase the product or the service, but 
that is not really considered in the model. So in the model, is 
it?
    Mr. BEACH. Yes, it is. It is like the discussion we had 
about eliminating Social Security. If we reduce the Social 
Security in the models that I use, there would be a definite 
effect in the reduction in transfers to individuals. And so 
consumption expenditures would fall, and you would see a change 
in relative prices, and we would all have an effect. So nothing 
happens in isolation inside these models at all.
    Mrs. BLACK. Thank you. I yield back.
    Chairman CAMP. Well, thank you. And I want to thank our 
witnesses for their testimony and time today. And with that, 
this hearing is adjourned.
    [Whereupon, at 12:36 p.m., the Committee was adjourned.]
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