[Congressional Record Volume 141, Number 17 (Friday, January 27, 1995)]
[Senate]
[Page S1709]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
DYNAMIC REVENUE ANALYSIS
Mr. ABRAHAM. Mr. President, a few weeks ago I sat through a hearing
of the House and Senate Budget Committees on the issue of dynamic and
static revenue estimating. At this hearing, the staff of the Joint
Committee on Taxation presented a statement that seemed particularly
concerned about an article that Bruce Bartlett of the Alexis de
Tocqueville Institution had published in the Wall Street Journal a few
weeks ago. Since I know Mr. Bartlett personally, I was especially
interested in what he had to say.
Apparently what the Joint Committee staff is most concerned about was
Mr. Bartlett's discussion of an exchange Senator Packwood, the chairman
of the Finance Committee, had had with the Joint Tax Committee
regarding the revenue effect of raising the top tax rate to 100 percent
on those earning more than $200,000. According to Senator Packwood, the
Joint Committee had predicted some $200 billion per year in additional
revenues from this tax change. Senator Packwood rightly characterized
this estimate as questionable.
Now, according to the Joint Committee staff, there was nothing wrong
with this estimate because it included a caveat that it did not take
into account any behavioral response. They then included in an appendix
to the statement a complete set of correspondence between Senator
Packwood and the Joint Tax Committee on this matter. Apparently, the
Senator from Oregon has had a long time interest in this issue and has
periodically asked the Joint Committee to update its estimates.
I do not believe that simply appending a caveat is at all adequate.
The fact is that a 100-percent tax rate would raise zero revenue and
everyone knows it.
If this were merely an academic discussion, it would not concern me.
But under the budget laws and established practice, we are required to
treat these estimates from the Joint Committee as if they are
scientific truth. And we all know that these estimates carry enormous
weight when it comes to legislating changes in the Tax Code. If the
Joint Committee says a tax cut will lose $101 million and there is only
room in the budget for a $100 million tax cut, then you are out of
luck. A point of order will prevail and your tax proposal is out the
window.
Now, I had always assumed that the whole point of having revenue
estimates on tax bills was so that we could project the actual effect
of tax changes on the Government's aggregate revenues as accurately as
possible. Yet here we have clear evidence that the Joint Committee has
produced estimates for the chairman of the Finance Committee that do
not fully account for behavioral changes.
I am very concerned about this because the Joint Committee on
Taxation probably produces hundreds of estimates during the course of a
year that effectively have the force of law. Even the Treasury
Department's estimates do not have the same weight as those produced by
the Joint Committee, because the Congress will always defer to its own
staff in a dispute with the administration. It makes me wonder what
other caveats are buried in these estimates that have not gotten any
attention in the past.
In any case, the sensible thing would seem to be for the Joint
Committee to produce estimates that it actually believes are as correct
as possible, in terms of the actual effect on the Government's revenues
of any changes in tax policy.
Apparently, this matter of improving the quality of revenue estimates
has become a political issue, with those opposed to certain tax
proposals standing firm against any dynamic scoring. This is apparent
from the article I read in the Wall Street Journal, in which the
chairman of the President's Council of Economic Advisers, Laura
D'Andrea Tyson, also attacks my
friend Bruce Bartlett for noting several instances in which the Joint
Committee's estimates for tax increases were far too high.
Ms. Tyson states that Mr. Bartlett ignored the many times their
estimates were too low, as though this constitutes a defense of the
Joint Committee's methodology. However, it seems to me that being too
low is just as bad as being too high.
Ms. Tyson further notes that the Joint Committee's estimates were
somethings wrong because of unforeseen events. She implies that the
collapse of oil prices in the early 1980's was such an unforeseen event
that made the Joint Committee's estimate of the windfall profits tax be
far too high. In fact, as I recall, there were a number of economists
at that time who were arguing that decontrol of the price of oil was
very likely to reduce the price of oil by encouraging additional
drilling and exploration. In fact, I believe that this is exactly what
did happen.
Lastly, Ms. Tyson indicates that the reason why corporate tax
revenues fell after the Tax Reform Act of 1986, rather than rise in
accordance with Joint Committee estimates, is because corporations
ceased doing business as corporations and began operating as
partnerships or subchapter S corporations. Thus the revenue that was
lost on the corporate side was made back on the individual side.
The point here is that the 1986 act lowered the top individual income
tax rate below the top corporate rate. I think most tax lawyers could
have easily predicted that this would lead people to take advantage of
this differential by reorganizing their businesses so as to be taxed at
the individual rate rather than the corporate rate.
While it may be true, as Ms. Tyson says, that the Treasury did not
actually suffer that much of a net revenue loss, it still does not
explain the Joint Committee's apparent estimating errors.
Personally, as a legislator, I want the best possible information
before I make a decision. I think the Joint Committee and the
Congressional Budget Office should at least explore the possibility of
preparing dynamic revenue estimates. Their revenue estimating models
should be improved and updated to account more fully for changes in
behavior and economic growth. Perhaps a commission comprised of public
and private sector experts could be established to recommend reforms in
the revenue estimating process.
I would suggest we keep the current static revenue scoring, but
require the Joint Committee to provide a range of possible dynamic
revenue estimates for major tax bills for illustrative purposes only.
After a period of time, we could compare the static and dynamic
estimates to see which ones came closer to reality.
As a member of the Senate Budget Committee this is a matter I intend
to follow closely as time goes by. My only interest, as I said, is to
get the best, most accurate, information possible. I yield the floor.
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