Tag: Professionalism

Tax Foundation Score of the Tax “Reform” Conference Report

Posted on by Brad DeLong
Mnuchins

Alan Cole: @AlanMCole on Twitter: “Don’t think this one’s gonna pay for itself, guys:”

John Buhl: @jbuhl35 on Twitter: “Because of the nonstop work of @ScottElliotG @NKaeding and others, we have a dynamic score of the conference committee version of the #TaxReformBill https://twitter.com/jbuhl35/status/942735485566365698 Full report to come later today.”

Alan Cole: @AlanMCole on Twitter: “1.7% change in long-run GDP is a pretty bad score from @taxfoundation all things considered, given how large the tax cut is. One problem is they got rid of the shortened asset life for structures in conference…”

The rules of thumb I find myself applying to Tax Foundation numbers these days are:

  1. Their “small open economy with perfect capital mobility” assumptions together bias and triple the long run boost to the level of GDP relative to the baseline. The US is a large economy: global interest rates are not unaffected by it. International capital mobility is not perfect: home bias is a huge thing.

  2. Their “1/e time to the long run is 10 years” assumption biases and doubles their estimate of the initial growth rate boost..

  3. Their failure to distinguish between Gross Domestic Product and national income causes an additional substantial bias that depends sensitively on the details.

  4. Their failure to take account of how the tax “reform” is going to be financed—what will be the effects on economic growth of the services and public investments cut, or of the additional taxes elsewhere in the economy that will be levied—causes an additional substantial bias that depends sensitively on the details.

So if you are talking about the impact on the growth rate of national income, divide the Tax Foundation by more than six and you have what is probably a sensible estimate.

Thus take the Tax Foundation’s 0.17%/year. Cut it down. To less than 0.03% per year. Not 0.3%. Less than 0.03%.

The claim was the 0.4% per year on the growth rate would get you 1 trillion dollars in revenue over 10 years. That was always stretching it: it was 0.5% per year. But we do not have that. Even if we were a small open economy in a world with perfect capital mobility–which we are most definitely not–the Tax Foundation grants you only 350 billion dollars over 10 years. And applying my rule of thumb haircuts makes me expect 60 billion.