PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

A Fictional Tax Tale on Tax Reform.  Are Your Surprised?

By at 12 October, 2017, 11:40 pm

by Raymond J. Keating-

In some circles, when it comes to the current debate over tax relief and reform, apparently almost anything goes. Consider the rather detailed projections recently served up by the Tax Policy Center (TPC), operated by the Urban Institute and the Brookings Institution, on the basic tax plan framework offered by the “Big 6” negotiators and President Trump.

Economists and policy experts have discredited the analysis, and rightly so, yet many in the media continue to use the TPC’s fantasy assumptions and findings in order to mischaracterize the GOP’s and Trump Administration’s tax reform goals.

The Tax Policy Center (TPC) published a study purporting to give long-term projections of the tax revenue effects of the “Big 6” tax reform framework. One problem: the details are still coming together, so the TPC used it own details of what they think the plan will include. Hmmm. They are using their findings to undermine support for pro-growth tax reform.

Background

On September 27, the “Big 6” released its tax plan framework, which offers an outline from which Congress has yet to hammer out important details. In the framework, among the key proposed changes are the following:

• For businesses, the corporate income tax rate would decline from 35 percent to 20 percent, and the top individual tax rate that applies to business pass-through entities, such as sole proprietorship, partnerships, S-Corps and LLCs, would drop from 39.6 percent to 25 percent.

• Full expensing of capital expenditures would be allowed for five years, though it would exclude new buildings.

• In terms of the taxation of international earnings, the framework calls for moving away from a worldwide tax system and closer to a territorial system utilized by most other nations, thereby reducing the tax penalty for bringing the profits of U.S. international firms back to the U.S.

• For individuals, “the current seven tax brackets into three brackets of 12%, 25% and 35%,” with the possibility of a higher additional rate on upper-income earners, and many deductions, exemptions and credits would be eliminated.

• The death tax would be eliminated, as would the individual and corporate alternative minimum taxes.

There are some very good policy goals in this nine-page document with less than 1,900 words. Obviously, we prefer even lower rates, permanent expensing, along with other pro-growth measures. Congress now must debate, discuss, change and flesh out important details. The meat, if you will, must still be put on the bone.

The TPC Fantasy Plan  

Despite this being a framework, however, two days after the “Big 6” plan was released, the TPC published a study purporting to give long-term projections of the tax revenue effects. Hmmm.

But in the document, the TPC acknowledged: “Many aspects of the plan were unspecified or left to be determined by the tax writing committees in Congress. The Tax Policy Center (TPC) has completed a preliminary analysis of the proposals contained in the unified framework based on previous proposals such as the House Republican leadership’s ‘A

Better Way’ blueprint and the Trump administration’s April outline. While the revenue, distributional, and economic effects are likely to change as policy makers negotiate the details, this analysis provides an estimate of the effects of the September 27 framework as we currently understand it.”

So, the TPC put out estimates based on a comprehensive plan that does not exist.

The report is rooted in what the TPC is guessing will be cobbled together from this framework and other plans. Well, that seems problematic, to be generous.

Bad Modeling

And then there’s the modeling being used. That is, as noted in the TPC report, “This report uses conventional scoring methods that assume the tax proposals do not affect the overall level of economic activity.”

So, it’s conventional in economic modeling of tax changes to leave out the economic effects of tax changes? That would seem to be a major problem with “conventional” modeling.

A Tax Foundation report neatly sums up why static analysis is inadequate in terms of how the economy actually works:

“Static scoring assumes that tax changes don’t affect behavior of individuals and firms, and therefore have no impact on growth. Dynamic scoring, on the other hand, assumes that tax changes influence the amount of savings and investment—the engine of economic growth. As the amount of savings and investment change, the overall economy changes as well. Failing to take account of such a simple economic relationship results in misleading forecasts.”

Again, with the TPC report, we’re not really dealing with economic reality.

Ah, but then the bias of the TPC is revealed when declaring that “we would expect the framework to have little macroeconomic feedback effect on revenues over the first decade.”

In reality, basic economics tells us that reducing the costs and enhancing the returns of, for example, starting up, owning, operating or investing in a business, such as through tax relief via lower tax rates and expensing, will incentivize these undertakings and, in turn, spur economic, productivity, income and job gains. That’s not really in serious dispute, and has been confirmed by seemingly countless studies over the years. (See SBE Council’s Small Business Tax Index for a list and summary of more than a dozen of such studies.)

So, the TPC estimates of the revenue effects of this tax framework are based on assumptions regarding much of the plan, on modeling that ignores the economic effects of tax changes, and apparently on a general and faulty belief that there wouldn’t really be much impact on economic growth anyway from the directional changes being suggested in the plan.

CEA Chairman Responds

In a recent speech on the tax framework, Kevin Hassett, the chairman of the Council of Economic Advisors, summed up the problem with the TPC report this way (watch the following remarks here):

I think you’d agree with me that taxes do impact the economy, otherwise neither of your organizations would exist. In other words, taxes matter. They impact the economy. It’s scientifically, I think, indefensible, as the Tax Policy Center report does last Friday, to say that the framework, the tax framework that we’re here to talk about, would have little macroeconomic feedback effect. I think it’s simply inconsistent with mountains of evidence that I’m about to discuss, to have no growth effects from the tax changes this significant. It’s inaccurate, I think it’s fiction.

As for the static analysis released last week, to which I’ll return later, I think it too is based on many fictions. I think that the Tax Foundation behaved responsibly when they decided to wait for the final details to analyze the bill. I’m sure many people in these halls have been struck and perhaps even dismayed by the tone and pushback from around Washington regarding the Tax Policy Center report. I think that’s what happens when you behave irresponsibly. That’s why the Tax Foundation decided, correctly, to wait for the complete plan.”

In the end, the TPC analysis not only fails to advance or illuminate the current debate and discussion regarding tax relief and reform, but actually misdirects the discussion. Therefore, one must ask: What was the point exactly of this TPC report?

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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