At the same time, the TPC model assumes that regardless of the tax rate, people work the same amount, save the same amount, and invest the same amount. Thus, changes in the tax code have no effect on the amount of before-tax income. 4 Because these so-called macro-dynamic behavioral responses are zero, no analysis of tax reform can ever show an increase or decrease in the total level of income in the economy. It follows that the revenue effects of any such changes are constrained to be zero.

What are we to make of this assumption? The first thing to note is that it is not idiosyncratic to the TPC. It is made, for example, by revenue estimators in the Treasury and the Congressional Joint Committee on Taxation. 5 Thus, the TPC has not rigged its modus operandi in order to make the Romney proposal look bad. This observation, though, leaves unanswered the question of whether it is a sensible approach. My own view is that it provides an answer to an interesting question: If one wants to avoid the complications and uncertainties associated with the issue of how taxes affect economic growth, how does a tax reform change the amount of revenue collected and its distribution across income groups? The assumption also provides a measure of consistency when estimating the revenue effects of hundreds of potential changes in the tax law considered by the Congress each year.

That said, one might want to incorporate macro-dynamic behavioral responses into the analysis for several reasons. First, when concerned citizens are looking at tables that purport to show the taxes that would be paid by various income groups under a given tax proposal, they might reasonably expect to see, well, the taxes that would be paid by various income groups under that proposal. Analyses that assume zero macro-dynamic behavioral responses don’t meet that desideratum. Indeed, my highly unscientific survey of professional economists who aren’t tax policy aficionados6 revealed that they were generally incredulous when I told them that the numbers being discussed in the press are based on calculations that explicitly rule out any changes in labor supply or saving behavior.

Second, and relatedly, in the academic literature, it would not be considered exotic or even mildly controversial to include behavioral effects in analyses of tax policy. There is a long tradition of doing so. Indeed, my guess is that it would be challenging to publish a paper on the distribution of the tax burden in a first-rate academic journal if that paper assumed that no one’s labor or savings behavior differed across various tax regimes.

Finally, it seems odd to assume away possible increases in incomes associated with a given tax reform proposal when its explicit goal is to enhance growth. This observation raises another reason that is given for excluding macro-dynamic effects—the impact of taxes on economic growth is uncertain. To be sure, there is a lot of disagreement on this issue among professional economists. But that is not sufficient cause to assume that the right answer is exactly zero. Rather, a more sensible approach is to consider alternative assumptions about how tax reform might affect the size of the economy, and see how they affect the substantive conclusions. As explained in the next section, this is the tack that I take.