Q: How does your analysis deal with potential economic growth effects of the tax proposals?

Estimates from the Congressional Budget Office and other sources indicate that the effects of tax cuts on the macroeconomy are likely to be small or even negative over the typical 10-year budget window, depending in part on how they are financed.

In revenue-neutral tax changes, the tax rate reductions can raise incentives to work, but the base-broadening measures increase the portion of Americans’ income that is subject to tax, and create incentives that would work in the other direction. At the end of the day, the net effects are likely to be small (Auerbach and Slemrod 199711, Brill and Viard 201112). A 2007 Treasury report that analyzed the effects of business tax changes on business competitiveness concluded the following: "Indeed, the Treasury Department estimates that the combined policy of base broadening and lowering the business tax rate to 28 percent might well have little or no effect on the level of real output in the long run because the economic gain from the lower corporate tax rate may well be largely offset by the economic cost of eliminating accelerated depreciation" (p. 48).

Nevertheless, as we discuss in the paper, our results are not qualitatively different, even if we include additional taxes generated from the growth effects implied by the rule of thumb estimates from Mankiw and Weinzierl (2006).

Citerank: (9) 230964Conclusion is robustWhile maintaining the claimed growth increment from the Romney plan is likely to be slight, the TPC analysis does consider whether growth predicted by Mankiw (a Romney backer) and Weinzeri would rescue the plan. They conclude it makes little difference.1198CE71, 231212Brill and Viard studyThe TPC cites a study by Alan Viard and Alex Brill indicating that lowering tax rates while broadening the base generally does not reduce work disincentives because it leaves effective tax rates unchanged. Elsewhere Brill has defended the Romney plan.1198CE71, 231214CBO and JCT studiesIn addition to the Brill and Viard study the TPC paper refers to additional studies from the Congressional Budget Office and Joint Committee on Taxation that it claims show that tax cuts even without base broadening would have a small effect.1198CE71, 231725The TPC defendsThe TPC has three lines of defense of its assumption on the growth effect of tax reform - firstly, they point to difficulties in estimating such effects; secondly they cite studies showing such effect will be small; thirdly they claim their analysis is robust even if some such growth is assumed.13EF597B, 232180Modelling difficultiesIn responding to the growth criticism the TPC remarks that to do this properly, all manner of other things would need to be included in the analysis - not just the impact of tax reform in isolation.1198CE71, 232648No - it does not computeThe Tax Policy Center argues in its analysis that the various elements of the Romney plan cannot all be achieved. The TPC paper has been invoked and/or defended by almost all of the critics of the Romney plan in the debate.959C6EF, 232649The TPC caseThe essence of the Tax Policy Center's argument is contained in the excerpt from their paper cited below. We have parsed the argument into a set of premises that must be true for the argument to hold and mapped the debate about each.1198CE71, 232650Available savings claimThe TPC set out a number of assumptions concerning the amount that could be raised by eliminating tax expenditures that benefit high income earners in the individual tax system (the analysis does not include corporate tax). These are enumerated in the cited section.22FF97FF, 232652Growth effect claimIn estimating the revenue effect of the Romney tax reform, the TPC authors needed to make some assumptions about how tax reform affects economic growth. They argue that Romney tax reform would have little effect on GDP growth - but that their conclusions are robust even if some growth eventuates.22FF97FF

Discussion: Achieving Revenue Neutrality Using Optimistic Assumptions about Economic Growth

Finally, we provide a discussion of whether it is reasonable to expect any additional economic growth from a reform plan that was revenue neutral or nearly revenue neutral, and what the potential consequences for the above results would be if revenue reductions were offset partially by increased economic growth.

Traditional tax scoring— including the revenue estimates done by the TPC, the Treasury, Congressional Budget Office and the Joint Committee on Taxation—accounts for many of the behavioral responses to lower tax rates that could result in higher tax revenues. For example, traditional “micro-dynamic” scoring takes into account that that lower tax rates may lead taxpayers to engage in less tax avoidance, or that eliminating the home mortgage interest deduction might lead taxpayers to hold less housing-related debt.

Traditional scoring does not account for potential additional revenues arising from higher macroeconomic growth due to higher labor supply or capital investment. Traditional scoring has generally ignored these effects both for technical reasons—there is little agreement about how to effectively model the macroeconomy—and practical reasons—any model of the macroeconomy would require a full analysis of the entire federal budget, the budget deficit, and the anticipated response of monetary policy to changes in the budget. Furthermore, estimates indicate that the effects of tax rate reductions on the macroeconomy are likely to be small or even negative, at least, over the typical 10-year budget window.

What’s more, as discussed above, there are particular reasons to be skeptical that revenue-neutral tax cuts will have much effect on growth. While lower tax rates provide a stronger incentive for employment and saving, base-broadening measures would increase the portion of Americans’ income that is subject to tax, and this would create incentives that would work in the other direction. At the end of the day, the net effects on labor supply and saving behavior would likely be small. As Brill and Viard summarize, “lowering statutory tax rates while broadening the income tax base generally does not reduce work disincentives because it leaves the relevant effective tax rates unchanged” (Brill and Viard 2011). 20 To the degree that tax expenditures were reduced by proportionately larger amounts for high-income groups, as assumed in this exercise, the Brill-Viard observation would be even stronger.