Joint Committee on Taxation Report Shows How Romney-Style Tax Plan Could Boost GDP and Jobs

October 18, 2012

Last week, the Joint Committee on Taxation released a “thought experiment” which purportedly showed that eliminating various tax preferences would only allow for a 4 percent reduction in tax rates. While the Joint Committee’s study has been criticized by various third parties, it is particularly curious because it directly contradicts another JCT study produced in 2006 which modeled a revenue-neutral plan to cut tax rates across-the-board by 23.5 percent while broadening the tax base. The 2006 study found that such a plan would boost long-term GDP, capital formation and employment.

The proposal JCT modeled in 2006 sounds a lot like the Bowles-Simpson plan. It eliminated all personal exemptions, itemized deductions, and  personal credits except for the earned income credit. It also repealed all above-the-line adjustments to income except for retirement savings deductions and the deduction for self-employment taxes. In addition, it repealed the exclusions for employee fringe benefits, such as employer contributions for health and life insurance. The plan retained the standard deduction.

As can be seen below, eliminating these tax provisions allowed for a 23.5 percent across-the-board cut in tax rates. As the table below shows, the bottom tax rate was reduced from 10 percent to 7.55 percent and the top rate was reduced from 35 percent to 26.8 percent.

Here is Table 1 from the study

2007 Income Brackets for

Single Filers (estimated)

2007 Income Brackets for

Joint Filers (estimated)

2007-2010

Statutory Tax Rates (present law)

Statutory Tax Rates After 2010 (present law)

 

Proposed Statutory Tax Rates

<$7,775

<$15,551-$63,200

10

15

7.55

$7,776-$31,600

$15,551-$63,200

15

15

11.55

$31,601-$76,550

$63,201-$127,600

25

28

19.1

$76,551 - $159,700

$127,601-$194,450

28

31

21.4

$159,701-$347,250

$194,451-$347,250

33

36

25.2

>$347,250

>$347,250

35

39.6

26.8

JCT then used three very different models of the U.S. economy to simulate the economic effects of the plan on such factors as GDP, the capital stock, consumption, and employment. These models include: A macroeconomic equilibrium growth model (“MEG”); an overlapping  generations lifecycle model (“OLG”); and, a dynamic stochastic general equilibrium growth model with infinitely lived agents (“DSGE”).

The results of the simulations using each of these models indicate that such a plan would boost real GDP in both the short-run and in the long-run, and lead to higher private sector employment.

Below are the tables summarizing these results.

Table 2.–Percent Change in Real GDP Relative to Present Law

 

Percent Change in Real GDP

 

2006-11

 

2012-16

 

Long Run

 

MEG, Base Elasticity

 

1.1

 

1.9

 

0.9

MEG, Low Labor Elasticity

0.9

1.6

0.2

OLG, Transfer Offset

1.2

1.9

2.6

OLG, Tax Rate Offset

1.2

1.1

1.2

DSGE, Lagged Transfer Offset

0.1

1.2

3.5

DSGE, Lagged Government

 

 

 

Consumption Offset

0.1

1.2

2.5

MEG, Keep Housing Deductions

0.8

1.6

0.5

 

Table 7.–Percent Change in Private Sector Employment Relative to Present Law

 

Percent Change in Private Sector Employment

 

2006-11

 

2012-16

 

Long Run

 

MEG, Base Elasticity

 

1.0

 

1.7

 

2.5

MEG, Low Labor Elasticity

0.7

1.3

2.0

OLG, Transfer Offset

1.1

0.8

0.4

OLG, Tax Rate Offset

1.4

0.9

0.6

DSGE, Lagged Transfer Offset

0.0

0.8

1.8

DSGE, Lagged Government

 

 

 

Consumption Offset

0.0

0.8

1.1

MEG, Keep Housing Deductions

0.9

1.6

2.6

While economists will differ as to how “dynamic” these three simulation models are, it is clear that even under different assumptions, a plan to cut tax rates and broaden the tax base can be shown to boost the economy and create jobs.

However, someone should ask the Joint Committee on Taxation what prompted them to release their latest “thought experiment” one month before the presidential election and why it doesn’t mirror the results they found in their 2006 study.   

 

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