Economists and tax policy analysts who testified at a House Ways and Means subcommittee hearing July 30 generally believed dynamic analysis to be an essential tool for predicting the impact of comprehensive tax reform on the economy.
Subcommittee Chairman Pat Tiberi (R-OH) convened the hearing to get feedback on the tax reform discussion draft released by Ways and Means Committee Chairman Dave Camp (R-MI) earlier this year. When Camp released his tax reform proposal in February, the Joint Committee on Taxation conducted both a static and a dynamic evaluation of the plan. Under the static analysis, the plan was projected to reduce the deficit by $3 billion over a 10-year period. The dynamic analysis released by JCT projected the draft would increase economic output and employment over that same 10-year window.
Tax Foundation President Scott Hodge said the Camp plan contains many positive provisions that would promote growth and competitiveness, including the reduction in the corporate tax rate to 25 percent and the cut in the individual income tax rates to 10 percent and 25 percent. However, some of the offsets in the draft that were required to keep the plan revenue neutral would actually dampen the growth potential for the plan, Hodge said.
“In order to do tax reform right, [policymakers] should not have to wait for a dynamic analysis of the final tax reform plan,” Hodge said. “They should be provided a dynamic analysis of each component of the plan as it is being constructed. Only then will members know which components maximize growth and which slow growth.”
Economic growth should be the primary objective of reforming the tax code, Hodge said. A simpler, fairer tax code may also be desirable, but if getting there slows economic growth, then those policies should be reconsidered.
The JCT analysis of the Camp discussion draft shows positive, but modest, growth, mainly due to the stimulus effect of reducing individual income taxes, thereby increasing individuals’ proclivity to spend, according to John Buckley, former chief tax counsel at Ways and Means and former chief of staff at JCT. But in order to stay revenue neutral, the Camp plan would shift greater tax liability to domestic businesses in the form of increased costs of capital.
“The JCT analysis does not answer the question of whether the long term stimulus and labor supply impacts of the individual tax reductions will offset the long term, negative impact on business investment,” Buckley said.
Buckley encouraged Congress to examine the underlying supply side principles in any macroeconomic model and work to create an “even playing field” that doesn’t worsen domestic investment while liberalizing tax rules for the overseas operations of U.S. multinationals.