Yesterday, the 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. Policy Center released their analysis of Governor Jeb Bush’s tax reform plan. They found that if the plan were enacted in 2017, it would cut taxes by $6.8 trillion over the following ten years. They also find that the plan would cut taxes for all income groups, but the largest increase in after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. would go to the top taxpayers. In their analysis they did mention that the plan would reduce marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s on both labor and capital, which could lead to a larger economy, but they did not attempt a full dynamic analysis.
We too found that the Bush plan would result in a net tax cut over the next decade. We also found that the plan would result in an increase in after-tax incomes for taxpayers in all income groups. In fact, our distributional tables are very similar to theirs (besides the fact that we break them down by decile and they break theirs down by quintile).
A notable difference between our analysis and TPC’s is that their ten-year revenue estimate is approximately 85 percent larger than ours. We estimated that if the plan were in place in 2015, the total loss in revenue over the next decade would be $3.66 trillion. Theirs, as stated above, is $6.8 trillion.
Fortunately, their analysis was very transparent and it is actually pretty easy to determine where this difference comes from. In fact, they devoted a portion of their paper to reconciling the differences in our estimate and theirs.
First, there were a number of provisions we didn’t model due to either sufficient uncertainty about the details, or limitations with our model. TPC modeled these and, in some places, made assumptions about how they would work. For example, moving to a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. may have a positive or negative revenue impact depending on which rules are enacted, behavioral assumptions, and the overall rate at which the U.S. taxes corporate income. The Treasury has stated that the switch could either lose up to $130 billion or raise $76 billion over a decade. Without specifics from the campaign, we felt it was best to leave it out. (As a note: it seems as though TPC chose territorial estimates at the high-end of the cost range. They estimated that it would cost about $160 billion over ten years). Other provisions we couldn’t model included the ability for second-earners to file as singles.
TPC estimated that those provisions explain $900 billion in the difference between our estimates.
Second, TPC’s revenue estimate assumed that the Bush plan is put in place in 2017. We estimated the cost as if the plan were in place in 2015. This is has an impact on the total cost, because nominal GDP will be higher in the future, so tax cuts enacted in the future will look larger in nominal dollars. If we were to model the Bush plan as if it were enacted in 2017, our cost figure would increase by $400 billion.
Lastly, it seems as though TPC’s estimate of Bush’s plan in the first decade includes significant transitional costs that disappear over the long-run. In other words, some provisions may have an up-front cost that is larger than their long-term cost. For example, if you move to full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. , there is a transitional cost as businesses take both partial deductions for existing capital investments from the previous regime and the full cost deductions of new capital investment. This makes full expensing look expensive in the early years. But after a number of years, the transitional cost will dissipate and full expensing will have a much lower steady state cost.
TPC’s revenue estimates show this clearly. According to their revenue tables, moving to full expensing, plus eliminating the interest expense deduction would lose $1.5 trillion over the next decade. However, by the next decade, these provisions would actually raise nearly $500 billion when full expensing has fully phased it. Without full knowledge of their assumptions about the transition to expensing, it is hard to tell if this is an overstatement of its costs in the near term.
As our analysis from September states, we did not estimate this, or other transitional costs. As such, our estimate of full expensing plus the elimination of the interest deduction was much closer to TPC’s second-decade estimate of those two proposals, which we estimate would raise $500 billion.
Overall, these three pieces account for 100 percent of the difference in our static revenue estimate and TPC’s. If you add back these three pieces, our deficit number would be very similar. The remaining $200 billion difference is likely due to smaller micro-dynamic assumptions TPC made that we didn’t or other differences in our models.
|
TPC and Tax Foundation Static Revenue Estimates |
|
|
Our Estimate |
-$3,666 |
|
Enacting plan in 2017 |
-$400 |
|
Omitted Provisions |
-$900 |
|
Expensing Transition |
-$2,000 |
|
Adjusted |
-$6,966 |
|
TPC Estimate |
-$6,773 |
As stated before, TPC’s distributional tables confirmed our earlier findings (I converted our decile table to quintiles for easy comparison). In September, we found that across all taxpayers, after-tax income would increase by approximately 3.3 percent on a static basis. They found an increase of 4 percent. We found an increase in after-tax income for the top one percent of 11.6, they found an increase of 11.9 percent.
TPC did not conduct a dynamic distributional analysis.
|
Comparison of Distributional Analyses |
|||
|
Effect of Tax Reform on After Tax Income Compared to Current Law (Fully phased-in) |
|||
|
TPC |
TF |
||
|
Static |
Static |
Dynamic |
|
|
by Quintile |
|||
|
0% to 20% |
1.4% |
1.2% |
9.8% |
|
20% to 40% |
1.8% |
1.9% |
10.6% |
|
40% to 60% |
2.5% |
2.8% |
12.5% |
|
60% to 80% |
2.5% |
2.9% |
11.7% |
|
80% to 100% |
5.8% |
3.8% |
10.8% |
|
99% to 100% |
11.9% |
11.6% |
16.4% |
|
TOTAL FOR ALL |
4% |
3.3% |
11.3% |
|
Source: Tax Foundation Taxes and Growth Model, Tax Policy Center |
We think it is important that multiple groups estimate the impact of different tax plans. It provides needed information to taxpayers on how plans will impact them and the government’s finances. Unfortunately, the one piece missing from TPC’s analysis is the most important: the tax plan’s impact on the overall economy and how the translates into costs or benefits for taxpayers and the government. The level of taxation and who pays is important, but so is the structure of a tax system. A tax code that reduces marginal tax rates on workers and investors will lead to a larger economy in the long run. This, in turn, will impact the government’s revenues. Everyone would benefit if TPC were to add to the chorus of groups that analyze tax policy while considering economic impacts.
Share