In a column on TheUpshot, Josh Barro claims that our analysis of the Rubio-Lee taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform plan is “too aggressive” and that he spoke with ten public finance economists who agree. Much of his criticism hinges on a quote by Laurence Kotlikoff, who felt the need to clarify his quotes by commenting on the article that our model “may be closer to correct than [Barro’s] column suggests.”
Our model produces results that the economic literature and data say we should expect. Our model uses the most up to date IRS data to calculate detailed tax burdens on work and investment. It plugs the effect of the tax changes into a standard Cobb-Douglas production function, which has been part of mainstream economics for 70 years.
The Rubio-Lee plan presents a complete overhaul of the tax code and moves us toward a consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. base while cutting taxes by $4 trillion over a ten year period on a static basis. Our analysis finds that this reform would increase investment by 49 percent, boost the size of the economy by 15 percent, and lift wages by 13 percent. These changes would not happen overnight; we assume it would take roughly ten years for the economy to adjust to the tax changes. At the end of this adjustment period, the economy would be 15 percent larger (equivalent to average additional growth of 1.44 percent each year over the adjustment period).
This result is in line with analysis done by other mainstream economists for similar tax changes. In a previous response to William Gale of the left of center Tax Policy Center, we wrote about a previous study by Alan Auerbach and Kotlikoff that estimates the effects of a proportional consumption tax, which would replace the federal individual and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. es with a wage tax and a business cash-flow tax. The study finds this revenue-neutral proportional consumption tax would eventually raise GDP by 9.4 percent.
However, the Rubio-Lee plan is not revenue-neutral, but a tax cut of $414 billion per year. Such a tax cut would raise GDP by about 6.6 percent, according to empirical estimates by leading economists such as Christina Romer, former chair of President Obama’s Council of Economic Advisors. Add that to the Auerbach-Kotlikoff 9.4 percent estimate of a revenue-neutral tax reform and you get 16 percent growth in GDP—more than our 15 percent estimate of the Rubio-Lee plan.
Other examples place the results of our model in the same range as the handful of economists who do this work. In a 2014 column in the New York Times, Kotlikoff found that eliminating the corporate income tax and raising the income tax an equal amount would result in growth of 8 to 10 percent. Our model shows that eliminating the corporate tax without a revenue offset would boost GDP by about 6 percent—slightly below Kotlikoff’s estimate. In our 2014 analysis of the tax reform proposal presented by then-Chairman Dave Camp, we came in at the bottom end of the range presented by Joint Committee on Taxation, the official tax scorers for Congress. Their models estimated a range of between 0.1 percent growth and 1.6 percent growth. Our model estimated 0.2 percent growth.
This is not to say that our model is perfect—no model is perfect—but it aims to reflect reality. Furthermore, we continually improve our model to bring it as close to reality as possible. And we want the best and brightest of the academic community to be a part of that process.
We welcome an academic debate about the assumptions in our model and how the economic literature says they should change. We are transparent with the equations and assumptions that drive our model and we look forward to a debate about facts, not out-of-context quotes and one-sided reporting.
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