Washington, D.C. (Mar. 6, 2014)—The Joint Committee on Taxation’s (JCT) estimates of the economic impact of Rep. David Camp’s tax reform plan may suffer from methodological flaws. New analysis by the nonpartisan Tax Foundation finds that the JCT’s report overstates potential growth, underestimates the impact from reduced investment, and makes incorrect assumptions about the effects of tax changes on consumption, and of consumption on growth.
The report finds:
Rep. Dave Camp deserves credit for introducing dynamic macroeconomic analysis into the tax reform discussion by requesting a dynamic score of his plan from the Joint Committee on Taxation (JCT).
According to the JCT’s macroeconomic models, the economic growth resulting from Camp’s plan comes from higher labor force participation and hours worked as well as higher consumption.
JCT’s models also show that Camp’s plan raises the cost of capital due to its heavy tilt toward lowering the tax burden on individuals at the expense of higher taxes on business and investment.
The JCT analysis overstates the resulting growth because it underestimates the impact of reduced investment on wages and it inappropriately includes consumption responses.
History tells us that capital is much more responsive than labor to after-tax returns, thus any dollar-for-dollar rise in the tax on capital and reduction in the tax on other sources of income must reduce total inputs of labor and capital and reduce GDP.
Ultimately, the plan’s effects on reducing capital formation will translate into lower wages for workers, lower economic growth, and, finally, lower tax revenues for the federal government.
“Rather than give lawmakers a clear year-by-year picture of the path of growth over the ten-year period, the JCT obscured these details by summarizing the results with averages for the first five years and second five years,” said Tax Foundation Senior Fellow Stephen J. Entin. “If JCT’s models show that growth is fading to zero by the end of the period, lawmakers need to know this and not have it hidden from view. Transparent information is critical to crafting good, pro-growth tax policy while avoiding harmful changes.”
Although JCT models tend to understate the negative effects of higher taxes on capital and investment, they clearly show the decline in capital formation over the second half of the ten-year window. We believe the plan’s effects on reducing capital formation ultimately will translate into lower wages for workers, lower economic growth, and, finally, lower tax revenues for the federal government.
A detailed analysis of the Chairman Camp’s plan using the Tax Foundation’s Taxes and Growth model will be released in the coming weeks.
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