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]

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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