Tax reform: making sense of the numbers

October 28, 2017

By U.S. Senator Mike Crapo This column is the third in a series of columns to discuss the need for comprehensive tax reform, rather than solely debating traditional rate cuts, review many of the tax reform proposals and ideas put forward from across the political spectrum, consider how reforms are estimated and reflect on the potential effects of the reforms being considered. The goal with this series of tax reform columns is to carry on a discussion with Idahoans about the reform efforts underway. In this column, I will write about how the cost of tax reform legislation is estimated, as it may be useful for the American people to understand a little more about how congressional scorekeepers will evaluate tax reform legislation under consideration in Congress. The devastating hurricane season has familiarized many Americans with the many different models that meteorologists use, like the Global Forecast System (GFS) model or the European model, to predict future weather activities. We see a similar situation when forecasting future effects on federal revenues of changes in tax policy. The Joint Committee on Taxation (JCT), the official revenue scorekeeper for Congress, also employs a number of different revenue estimating models. An explanation of the JCT’s revenue estimating process can be reviewed here. Like the different weather models, each revenue forecasting model has its own capabilities and limitations. In both cases, these models will produce a range of most likely outcomes. To better guide its decision-making process, Congress requires JCT to also select a specific point estimate from within that range of potential outcomes to be considered the “official” revenue estimate for that proposed tax policy change. However, in reality, none of the specific point estimates generated by any model should be considered to be 100 percent precise and accurate as to what would actually occur should the proposed policy be enacted. The JCT explains that, “A JCT revenue estimate compares predicted Federal revenues under the proposal with predicted revenues under present law. The revenue estimate equals:   * Predicted future revenues under proposed new law (proposal revenues).   * Less predicted future revenues under present law (baseline revenues).” Estimating the future costs of tax reform policy is challenging, as there are many variables to consider. But, these guides are needed to inform sound policy decisions. That is why we need to closely consider the estimates being used and continuously work to ensure that they are as accurate as possible. The challenge there is that a comprehensive reform to the tax code, last seen 30 years ago, would be expected to produce much greater secondary macroeconomic changes to federal revenues than we would have seen from many of the typical straight tax cuts or tax increases we have experienced since the last major reform, when macroeconomic modeling was much less evolved. Many of the measurement standards and talking points that we often see in tax debates in recent decades may not necessarily apply here. The momentum in Congress and the Administration to comprehensively reform our complex, costly to comply with, unfair and anti-competitive tax code is encouraging. Comprehensive tax reform can not only help set our nation on a more sound and competitive economic course, but also simplifying the tax code would be beneficial to Americans who exhaust finances and time filing under the current overly-complex tax code. Please continue to share your views and urge friends and family to get involved and let their Senators and Representatives know how they feel about the importance of these issues. Your efforts continue to be very valuable as we work together toward the enactment of the comprehensive tax reform our country needs.