Taxes and Growth

The Tax Foundation’s Taxes and Growth Model is a tax scoring model that evaluates the impact taxes have on the economy. The TAG Model estimates the impact tax changes have on wages, jobs, cost of capital, distribution of income, federal revenue, and the overall size of the economy. This information helps Members of Congress, journalists, and citizens better understand tax proposals.

The Taxes and Growth Model is comprised of two major components:

Taxes: The TAG Model plugs IRS data of U.S. tax returns into its tax calculator to evaluate the effect a new tax proposal would have on taxpayers across the income spectrum. The calculator generates the average and marginal income tax rates individuals will face, the after-tax incomes under the proposal, and “distributional tables” that display the after-tax effects of policy changes by adjusted gross income ranges and deciles. The results flow into TAG’s second component: Growth.

Growth: This is where economics comes in. TAG takes the information from the tax calculator component of the model and feeds it into the Growth component of the model. TAG takes the data and tax proposal and assesses the impact primarily on two key economic indicators: the cost of labor and the cost of capital. If the tax proposal raises the cost of hiring workers and making investments, economic growth decreases. If it lowers these costs, economic growth increases. 

For the economics behind the model, see here.

 

Frequently Asked Questions

1. What does TAG stand for?

TAG stands for the two major components of the Tax Foundation’s tax scoring model, “Taxes and Growth.”

2. What is the Tax Foundation’s Taxes and Growth Model?

The Tax Foundation’s Taxes and Growth Model is a tax scoring model that evaluates the impact taxes have on the economy. The TAG Model estimates the impact tax changes have on wages, jobs, cost of capital, distribution of income, federal revenue, and the overall size of the economy. This information helps Members of Congress, journalists, and citizens better understand tax proposals.

The Taxes and Growth Model is comprised of two major components:

Taxes: The TAG Model plugs IRS data of U.S. tax returns into its tax calculator to evaluate the effect a new tax proposal would have on taxpayers across the income spectrum. The calculator generates the average and marginal income tax rates individuals will face, the after-tax incomes under the proposal, and “distributional tables” that display the after-tax effects of policy changes by adjusted gross income ranges and deciles. The results flow into TAG’s second component: Growth.

Growth: This is where economics comes in. TAG takes the information from the tax calculator component of the model and feeds it into the Growth component of the model. TAG takes the data and tax proposal and assesses the impact primarily on two key economic indicators: the cost of labor and the cost of capital. If the tax proposal raises the cost of hiring workers and making investments, economic growth decreases. If it lowers these costs, economic growth increases.

3. What is tax scoring?

Tax scoring is one way that Members of Congress evaluate bills that reform the tax code. Using a series of mathematical functions and IRS data, economists are able to estimate the amount of tax revenue that a tax system or new tax proposal may provide to the government treasury.

The Joint Committee on Taxation is the official scorekeeper for legislation in Congress. Anytime a Member of Congress presents a bill, it goes to the JCT to receive a legislative score, so that policymakers know how much the bill will cost or how much revenue it will collect.

4. How does the Taxes and Growth Model differ from the tax scoring models Congress uses?

The tax scoring models used by the Joint Committee on Taxation or the Congressional Budget Office provide a “static” score for federal revenue and assume minor behavior effects that may shift income between industries. Generally though, their tax scoring models assume tax changes have no effect on the economy at large.

In contrast, the Taxes and Growth Model evaluates the impact that tax changes have on the economy, and how these changes affect wages, jobs, the cost of investment, federal revenue, and the size of the overall economy.

5. Why is the Taxes and Growth Model important?

Governments use taxes to raise revenues to pay for government services. By their nature, taxes have an impact on the economy, just as prices have an impact on consumers.

Currently, when policymakers request a tax estimate on a proposal, tax scorers only look at the accounting and fail to consider the economics of a tax change. Some tax proposals are bad for growth and others are good for growth. When you don’t consider the effect a tax proposal has, it makes it nearly impossible to accurately estimate future revenues.

The TAG model looks at tax proposals and estimates the way different tax changes will impact our dynamic economy. It evaluates the growth effect of a tax proposal, providing estimates of GDP, wages, jobs, and government revenues. This helps policymakers make smarter decisions when they craft tax reform legislation.

6. How is the tax scoring currently done by Congress flawed?

The current tax scoring done by the Joint Committee on Taxation is about accounting. The JCT takes tax proposals and calculates the revenue they will raise based on projections for the economy under current law. The issue with this method is that taxes change the economy and the way it grows. People respond to taxation and adjust their decisions accordingly.

If a tax proposal raises taxes on businesses and investment, then less money will be invested. This changes the future size of the economy and makes the JCT’s revenue estimate inaccurate.

At the Tax Foundation, we strive for greater accuracy in our estimates. The Taxes and Growth Model accounts for the effect a tax proposal will have on an economy and simulates the response, giving us a better estimate of the revenue a tax proposal will collect.

7. What kind of information does the Taxes and Growth model produce?

The Taxes and Growth Model provides estimates on the impact tax changes have on wages, jobs, cost of capital, distribution of income, federal revenue and the overall size of the economy.

8. How will lawmakers, taxpayers, and journalists use the information the model produces?

Members of Congress should use the Taxes and Growth Model to test and tweak their tax proposal to ensure the policies they create will add jobs, raise wages, increase the size of the economy and collect sufficient revenue.

Taxpayers can use the information from TAG to better understand tax reform. The results that our model produces provides taxpayers with information on the way a tax proposal will affect them and the economy in which they participate.

Journalists can use the results TAG produces to ensure their readers receive the most accurate information on economic and tax policy through detailed analysis of the tax plans in Congress and the way that those plans affect the economy.

9. What is the history of tax scoring?

The 1974 Budget Act created the Congressional Budget Office and made the Joint Committee on Taxation the referee of tax policy. The CBO and JCT were deemed the official scorekeepers for budget and tax legislation. By “long standing convention” the JCT assumes no economic effects in any tax legislation. In the mid-1990s, the JCT added macroeconomic analysis, but it is used rarely and only at the discretion of the House Committee on Ways and Means or the Senate Committee on Finance.

10. Where can I learn more about the Tax Foundation’s Taxes and Growth Model?

For more information (formulas, methodology, etc.) about the Taxes and Growth Model and the economics on which it is built, click here.

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