Treasury Dynamic Analysis of Tax Reform Options

Office of Tax Analysis, U. S. Department of the Treasury ^ | May 25, 2006 | R. Carroll, J. Diamond, C. Johnson, J. Mackie III

[n-tres-ted]

The Office of Tax Analysis of the U. S. Department of the Treasury has performed an analysis of the recommendations of the president's commission on fundamental tax reform. The report details findings of OTA regarding each of the two reform proposals by the commission, plus analysis of a third option: a personal consumption tax (PCT). Which plan produces the highest growth in capital and in income? The PCT, of course. This study uses dynamic scoring, which is good. But the study would have been even better if it had analysed the Fair Tax, which has substantial support in Congress, particularly in the House. The report is pdf format, so cannot be copied.

[n-tres-ted]

Another win for national consumption tax reform. Let's examine it more closely.

[n-tres-ted]

I think this is worthy of a ping. What do you think?

[SittinYonder]

mark

[wolfpat]

Background: The President’s Advisory Panel on Federal Tax Reform (the Tax Panel) released its report on reform of the federal income tax on November 1, 2005. The Tax Panel unanimously recommended two reform options: the Simplified Income Tax (SIT) and the Growth and Investment Tax (GIT). Both reform options are a hybrid of an income and consumption based tax. The Tax Panel also extensively examined a Progressive Consumption Tax (PCT). The Treasury Department’s Office of Tax Analysis (OTA) provided estimates to the Tax Panel on the likely growth effects for each of these plans.

This is just the introduction. It runs 28 pages.

[IncPen]

It runs 28 pages.

If I were president they'd have one page to explain it.

In big letters.

[StJacques]

". . . The report is pdf format, so cannot be copied."

Actually, it can be. Click the "Select" button on the Adobe Acrobat Reader Toolbar (I'm using version 7.0) and then you are able to highlight, copy, and paste from it.

I'll paste in some of the summary findings of the report here:

"Dynamic Analysis Models:

Three different models were used in the dynamic analysis to reflect the uncertainty inherent in modeling individual and firm behavior and the associated tax-induced behavioral responses. The use of several modeling frameworks allowed for a range of estimates to reflect the sensitivity of the results to underlying assumptions and modeling approaches. The models were structured to account for the effects of changes in the effective tax rate on capital and labor income and the consequent effects on economic growth.

The three models used by the Treasury Department for this dynamic analysis include:

(1) Solow growth model;
(2) Ramsey infinite horizon growth model; and
(3) Overlapping generations (OLG) life-cycle model.

Summary of Results:

All of these models predict that fundamental tax reform could lead to substantial increases in the national capital stock and national income. For example, the models suggest that the GIT recommended by the Tax Panel could lead to long-run increases in the capital stock ranging from 5.6 to 20.4 percent and long-run increases of national income ranging from 1.4 to 4.8 percent. The simulated growth effects of the SIT plan were considerably smaller, with long-run increases in the capital stock ranging from 0.9 to 2.3 percent and national income increases ranging from 0.2 to 0.9 percent. The growth effects of the PCT were the largest of the three plans, with long-run increases in the capital stock ranging from 8.0 to 27.9 percent, and long-run increases in national income ranging from 1.9 to 6.0 percent."

That pretty much gets to the heart of what's going on in the report, whose later parts are a feast for Statistics junkies who love to do "sigma" sum calculations.

[Admin Moderator]

The Activism sidebar is reserved for Activism, protests, news and business of Free Republic Chapters.

Not this.

Please read the following for FR's posting rules for further guidelines.

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Thanks,

[Bigun]

I think this is worthy of a ping. What do you think?

This is more than worthy of a ping it is huge in that I don't believe this sort of analysis has ever been undertaken before by an agency of the government and portends great things if it becomes a trend!

Dynamic scoring means the end for the status quo types in Washington and I, for one, could not be more delighted to see this!

[n-tres-ted]

Thanks a lot. I have to be out for a few hours, but back later.

[azcap]

What is a PCT (Progressive Consumption tax)? Is that where I tell the clerk at Walmart that I am a "rich capitalist" and then she charges me a higher sales tax than the welfare queen behind me???

[pigdog]

Sounds good to me and let's hope it DOES rid us of some of the Beltway Bastards,

[wolfpat]

I surprized you would ask such a question. It's very clear:

The plan is a bifurcated subtraction-method VAT where labor compensation is deducted at the business level and taxed at the individual level at progressive rates of 15, 25 and 35 percent. All business investment is expensed and interest is generally neither includible in nor deductible from the tax base.23 To conform to the President’s directive that tax reform recognize the importance of owner-occupied housing, the PCT includes a 15 percent nonrefundable capped tax credit for home mortgage interest payments.

See?

[pigdog]

Well, in looking into it a bit, it isn't what it appears to be (the so-called Personal Consumption Tax). In fact it is something quite different from what FairTax supporters know as a consumption tax:

"The Tax Panel’s Progressive Consumption Tax (PCT) is a modified version of David Bradford’s X-tax.22 The plan is a bifurcated subtraction-method VAT where labor compensation is deducted at the business level and taxed at the individual level at progressive rates of 15, 25 and 35 percent."

So we see that it is really a VAT+income tax in drag.

It IS good to see the dynamic analysis beginning to be used and that should greatly benefit the FairTax when it comes up for review.

[groanup]

Thank-you for the ping and I bump.

Into a battle on another thread and will take this up soon.

[Bigun]

IS good to see the dynamic analysis beginning to be used and that should greatly benefit the FairTax when it comes up for review.

Yes indeed!

I have not yet read this report and, in truth, could not care less what they were actually looking at. The fact that they were looking at anything dynamically rather than statically is HUGE!

[StJacques]

". . . Dynamic scoring means the end for the status quo types in Washington and I, for one, could not be more delighted to see this!"

We all should be delighted. Dynamic scoring means that over one hundred years after the Austrian Economist Eugen von Böhm-Bawerk pronounced his thesis that "capital is productive," that we can actually use it when projecting economic growth.

When they taught me this in grad school I thought it was so simple that it didn't even need to be debated:

". . . The idea that capital produces its own interest, whether true or false, seems at least to be clear and simple. It might be expected, therefore, that the theories built on this fundamental idea would be marked by a peculiar definiteness and transparency in their arguments. In this expectation, however, we should be completely disappointed. . . ."

[Eugen von Böhm-Bawerk, Capital and Interest: Book II, Ch. 1 (1884)]

Yes Eugen, we should indeed be disappointed, since we have to listen to Democrats tell us that we cannot assume that if more investment capital is placed in the hands of private entrepreneurs that there will be more growth.

I think Böhm-Bawerk would have understood Democrats very well.

[ancient_geezer]

Indeed worthy of discussion and a ping.

A Taxreform bump for you all.

If anyone would like to be added to this ping list let me know.

John Linder in the House(HR25) & Saxby Chambliss Senate(S25) offer a comprehensive bill to kill all federal income, SS/Medicare payroll, and gift/estate taxes outright replacing them with with a national retail sales tax administered by the states.

H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.

Refer for additional information:

• AllTheWeb search: "national sales tax" OR "national retail sales tax" OR "fairtax"

[pigdog]

Looks interesting - thanx much for the link.

[n-tres-ted]

Just got back. The cover of this report looks as if it was prepared for the Tax Reform Commission. The Commission is no longer operative; yet the report was published in late May. But I'm glad to hear your comments. Looks like the president ordered that the dynamic scoring be used in the study. I wish he could do the same to the CBO. Tell me more about what you think. Thanks.

[azcap]

The only other place I have ever seen the word "Bifurcated" used is in the description of The Devil's tail. hmmmm

[n-tres-ted]

Thank you. I'll try to be more careful.

[Mind-numbed Robot]

". . . The idea that capital produces its own interest, whether true or false, seems at least to be clear and simple. It might be expected, therefore, that the theories built on this fundamental idea would be marked by a peculiar definiteness and transparency in their arguments. In this expectation, however, we should be completely disappointed. . . ."

It is really simpler than it seems. Money is a commodity that is bought and sold. Interest is the price.

[lewislynn]

It is really simpler than it seems. Money is a commodity that is bought and sold. Interest is the price.

That's why the Fairtax taxes it.

[StJacques]

"It is really simpler than it seems. Money is a commodity that is bought and sold. Interest is the price."

True, but to an economist "Capital" is more than just money, it is "any asset that is available for use in the production of other assets." According to Böhm-Bawerk all of these assets; land, equipment, intellectual property, labor, capital goods, and more, "earn interest" or "pay dividends" when handled by an entrepreneur -- defined as one who takes the factors of production and turns them into capital Böhm-Bawerk was especially interested in showing how entrepreneurship was beneficial because an entrepreneur is able to expand the scope of what constitutes "capital" through his own creative enterprise. In other words, there was something inherently "subjective" in the nature of capital itself because capital was a thing of value, and for everyone in the "Austrian School of Economics" -- Böhm-Bawerk may have been their greatest exponent -- value was subjective in nature, an idea still drives many present-day economists mad.

I'll stop the lecture right here. Sorry if sounded pedantic. I became a big fan of Austrian Economics after discovering the so-called "Socialist Calculation Debate" in which several Austrian economists; Ludwig von Mises and Friedrich Hayek among them, put forth very convincing arguments, beginning in 1920, that a Socialist system simply could not survive because destroying private property meant destroying the means of exchange which made pricing systems so inefficient as to be unworkable. One of the greatest insights I ever read was Hayek's "prices are not merely 'rates of exchange between goods', but rather 'a mechanism for communicating information'." He showed quite convincingly in my opinion, that price systems evolve spontaneously with economic actors never being able to understand the consequences of their actions, whether these actors are economic agents or economic planners. Socialism wouldn't work because it could not possibly work.

I thought it was a thing of beauty when I first learned it and I still do so today. Hayek put his theory together between 1935-1945 and history proved him right. He died a little over a year after the Soviet Union collapsed, thus knowing that he had won one of the biggest theoretical debates in economic history.

[Bigun]

Excellent points all!I agree with everything you say and would add that we need to recognize the fact that we have been at war with anti capitalistic forces, both within and without our government, for quite some time now. Perhaps we have begun to turn the corner in that war.

[pigdog]

Indeed, anti-capitalist forces "... within and without our government ..." - and also on these threads!!

How right you are!!

[pigdog]

You'd then no doubt be aware of (and interested in) Dr. Kurt Richenbacher who has such informative newsletters. His material is very informative.

[StJacques]

". . . I . . . would add that we need to recognize the fact that we have been at war with anti capitalistic forces, both within and without our government, for quite some time now . . ."

Take a bow Bigun.

I have been amazed to see that, after the complete and utter failure of socialism we witnessed in the collapse of the Soviet Union, that the basic lesson of the failure of economic and social planning has not sunk in. How can they not get it? IT DOES NOT WORK! And I want to share one of my recurring observations about how the most basic aspects of economic theory are completely ignored by Democrats and others on the Left when presenting their arguments to the public.

Have you ever noticed how Democrats will start talking about how we "need to pay more attention to our economy" and then immediately go on to discuss anything but economic policy? Bill Clinton was the true master of this deception and I have raged against those who attempted to counter his arguments for their failure to call him down on it. Clinton would start off by saying "it's the American economy that matters here" and then go on to talk about health care, affordable housing, Social Security, jobs for African-Americans and the like. None of those were aspects of economic policy. Those items fall under the heading of social policy. And no matter how much Democrats and the Left try to pass them off as economic policy, they still remain parts of their agenda on social issues.

Of everything I can point to in the public pronouncements of Democrats and the Left that identifies them as anti-capitalistic (your well-placed comment Bigun), this is what leaps out at me most. Democrats and the Left simply will not discuss economic policy because they know that they do not have a chance of making their arguments stick. They will discuss social policy, and falsely call it "economics."

Forgive me for my rant, but this is one of my recurring observations of deception in national policy and I needed to get on my soapbox for just a moment to vent it out.

[StJacques]

"You'd then no doubt be aware of (and interested in) Dr. Kurt Richenbacher who has such informative newsletters. His material is very informative."

Yes I am. And I have read a few of his newsletters. Is it the Wall Street Journal that circulates them? I know they publish pieces by him on a regular basis. The von Mises Institute has discussed his work at some length. Richenbacher is the true "Cassandra of Debt" among modern economists, especially in his persistence at pointing out the relationship between how each dollar of GDP growth requires x dollars of debt to sustain it and further, that the x figure has been rising for some time now.

I don't think too many policy makers want to listen to Richenbacher these days. If he's right, it means we should cut both government spending and consumer credit interest rates dramatically. That does not go down well in Washington.

[Bigun]

Forgive me for my rant, but this is one of my recurring observations of deception in national policy and I needed to get on my soapbox for just a moment to vent it out.

No forgiveness required! In fact, I am very happy to make the acquaintance of another who "gets it"!

[pigdog]

I took out a subscription after reading several of his positions/papers and did so from a private organization.

If you'd like, I'll dig out the name of the firm and FReepmail you the particulars. Not advertising; just offering to help with information.

[StJacques]

". . . I am very happy to make the acquaintance of another who "gets it"!"

My pleasure as well Bigun!

[StJacques]

No need, I just googled his name and signed myself up for the "Daily Reckoning" e-mail, which includes Richenbacher's regular newsletter info. But thanks.

[Bigun]

As you have undoubtedly already observed, there are a good number of folks on this board claiming to have been schooled in the "dismal science" and that may well be but, given what they say here, I have to wonder if WHERE they obtained that training might not have been the Patrice Lamumba School of Economics at Moscow University!

[StJacques]

". . . I have to wonder if WHERE they obtained that training might not have been the Patrice Lamumba School of Economics at Moscow University!"

LOL!!!

It's amazing how many university professors there are, including many of those outside of Economics departments who discuss the subject as though they are "authorities" on it -- esp. History professors -- who still try to explain economics to their students in terms of "producer relationships," which is what Marx taught after all. Somehow they all have missed the revolution in economic thought that began as far back as the 1870's with Jevons, Walras, and Menger; all of whom finally decided to reject the labor theory of value and began to move the study of Economics away from one which placed the producer at the center of economic life and along the road to a social science that sees the consumer as primary, which is where any respectable economist will tell you the focus is today. Economies are driven by the forces of demand. It's as simple as that! And no matter how much social engineers seek to encourage policies that are meant to control the "relationships of production" -- even those of us who know better still cannot get away from the infection of Marxist terminology -- it's simply not going to work.

My favorite test of one's knowledge of Economics by the way, is to ask someone who considers himself or herself an authority to explain "why recessions happen." And if they can tell me that recessions are necessary for an economy to readjust the flow of investment capital to those enterprises that are most efficient in satisfying actual demand, then I'm prepared to discuss Economics with them. Otherwise I sit back and prepare to hear, sooner or later, some kind of exposition that's going to tell me why this or that group of people don't have good jobs and how some specific policy or set of policies will fix the problem. And my inevitable response that "you're going to have to do less to get more" is almost always greeted with incredulity. They sit back and accuse me of being stuck on Adam Smith when I'm really fixated on a train of economic thought that only begins a hundred years after him and did not really take off until the post-World War II era.

[pigdog]

Actually very funny ... but oh, too true!!

[pigdog]

Ah yes, Menger is my favorite "old master".

[StJacques]

"Ah yes, Menger is my favorite 'old master'."

I have him 2nd, right after Böhm-Bawerk.

[Bigun]

Economies are driven by the forces of demand. It's as simple as that!

Bears repeating! So I did!

The basic law of free market economies are as old as mankind.

If I you have something of value that I desire it is far easier and less costly for me to attempt to barter it away from you with something of value that I have and you want than to obtain it by any other means. It has always been thus and always WILL be thus in truly free markets.

The problem, of course, is that there are darned few, if any, of those to be found.

[StJacques]

". . . It has always been thus and always WILL be thus in truly free markets.

The problem, of course, is that there are darned few, if any, of those to be found."

I couldn't agree more. Even though I expect the 2nd Amendment fanatics to contest me on this, the real loss of freedom we have experienced over the past century has been our freedom of economic choice.

[Bigun]

...the real loss of freedom we have experienced over the past century has been our freedom of economic choice.

Hear Here! Which is why I have been known to say:

"We will never again be a truly free people so long as we have an income tax and the IRS."

[StJacques]

"'We will never again be a truly free people so long as we have an income tax and the IRS.'"

Yes; bring on the FairTax, turn the collection over to the States, establish revenue sharing to avoid dual payments by the citizenry for the same services, and abolish the IRS and a significant amount of "dual purpose bureaucracy."

And then we'll all be a lot more free and a lot more wealthy.

[Bigun]

AMEN! And the nation will be FAR healthier as well!

[pigdog]

"Dual purpose bureaucracy" ... LOL!!!

[StJacques]

""Dual purpose bureaucracy" ... LOL!!!"

Yes; and even though many Freepers on numerous other threads have accused me of NOT being a true conservative when we discuss topics like The Theory of Evolution vs. Intelligent Design, Immigration policy, the history of the Arab/Israeli conflict, and more; THIS is what draws the line for me. I believe that without a clearly-defined objective of limiting government power through a rationally-sensible program with its basis in sound economic theory that frees up private enterprise to work its magic, NO ONE makes the grade.

Too much of what many people consider to be "conservative" these days comes down to cultural issues. On many of those I fit in; I'm pro-life, opposed to Euthansia, opposed to research in stem cell cultures drawn from aborted fetuses, I oppose gay marriage, I rail against judicial activism, and more. However; none of that, in fact not all of that taken together, marks one as a conservative in my opinion. Either you want to control the power of the state (as a political scientist would use the term) to a far greater degree than it is now controlled and you have ideas on how to do it sensibly, or you're not a conservative.

The states and the federal government duplicate many functions in their bureaucratic structures. Health care and health policy, environmental policy, police power, business regulation, industrial standards, and on and on. It is not an accident of history that these functions were, for the most part, duplicated AFTER the federal income tax became law with the passage of the 16th Amendment and especially after FDR's increase of marginal income tax rates in the second world war. It is the IRS that has brought the true assault on our liberty.

And to anyone who doesn't think I'm a conservative, just put my views to Hillary Clinton, Michael Moore, Ted Kennedy, and the rest of their ilk and see how they label me.

I'm really enjoying this thread. It gives me the chance to rant a lot.

[Bigun]

Either you want to control the power of the state (as a political scientist would use the term) to a far greater degree than it is now controlled and you have ideas on how to do it sensibly, or you're not a conservative.

To this point sir you and I are completely in agreement.

Many who would CALL themselves "conservative" are not! For example, they do not see the harm in the local state university taking tax money and building facilities (apartment complexes) which compete directly in the markets from which the tax monies they used to build them are derived! I could launch into my own "rant" here but will reserve it for latter and suffice it to say that when the golden goose is dead he's DEAD!

[Bigun]

BTW: I usually get crosswise with many "conservatives when I say things like:

"I believe in personal responsibility, therefore we should repeal all laws (drug use, motorcycle helmet, seat belt, etc.) which seek to protect people from themselves."

[pigdog]

If you go back before FDR to Woodrow Wilson you'll see the genesis of many of the governments "socializations". Many began with Wilson who was truly a socialist and merely accelerated after that (FDR's masterstroke was the tax withholding - you should read Beardsley Ruml's speech from 1946).

[Mind-numbed Robot]

True, but to an economist "Capital" is more than just money, it is "any asset that is available for use in the production of other assets."

Because of the comment below I zeroed in on money rather than capital.

...if more investment capital is placed in the hands of private entrepreneurs that there will be more growth.

That seems to be talking about money, in my mind.

....value was subjective in nature....

Yes, beauty is in the eyes of the beholder but the market sets prices and money is the medium we use for bartering. There is intrinsic value, which is subjective, and market value which is reflected in price. Market wise, the value of anything is dependent upon what someone will pay for it.

[StJacques]

I am very familiar with Woodrow Wilson. I do not think it is correct to refer to Wilson as a "socialist," unless you look very carefully at the sense of the term before 1917, when many would have looked at English Fabian Socialism as the model, one that implied an evolutionary process of government responsibility for social justice, achieved primarily through regulating the power and wastefulness of monopoly capital. Wilson rejected Marxist doctrine from the outset and he was nothing but horrified at what he saw in the Bolshevik Revolution, which created more problems for him than a lot of people realize. And it is hard to make a case, in my opinion, that Wilson's New Freedom reforms of 1913-1915 look anything like Socialism. The Underwood-Simmons Tariff of 1913 was the first downward revision of tariffs since the Civil War, the Federal Trade Act establishing the FTC was meant to restore competition in the marketplace by curbing illegal business practices, the Clayton Anti-Trust Act of 1914 gave definition to the terms "monopoly" and "monopolistic business practice" -- again enhancing competition, and the Federal Reserve Act of 1913 created the cornerstone of American capitalism in the Federal Reserve. It can be argued that Wilson began to turn his legislative agenda more towards social justice in 1916 and that major reform legislation such as the Keating-Owen Child Labor Act, the Adamson Railroad Act, and the Federal Farm Loan Act were designed to appeal to the Left, who already liked Wilson's opposition to the war, and to "bring them in," but I don't think it approaches the label of "socialist" as we use it today.

It is worth pointing out that Wilson's decision to take the U.S. into the war in 1917 cost him the support of everyone on the left, which started the process of breaking up the reform coalition he put together. The Socialists opposed this completely.