Congress’ Tax Analysts Must Change, or Be Replaced

Posted March 13, 2007 at 5:55pm

In considering whether to pass a bill, Congress relies on the Joint Committee on Taxation and the Congressional Budget Office to estimate the effects the proposed legislation would have on tax revenues and government spending. The problem is that the estimates these agencies are providing are becoming more and more wildly erroneous. Moreover, the persistent errors are not random, but run consistently in one direction.

For example, Congress cut the capital gains tax rate from 20 percent to 15 percent in 2003. The JCT estimated that this would cause a revenue loss of $5.4 billion from 2003 to 2006.

But capital gains revenues instead rose by $133 billion during those years. As Dan Clifton of the American Shareholders Association says, “There is no excuse for this $138 billion error.”

The CBO made similarly wild errors. It projected capital gains tax revenues for the period from 2003 to 2006 to be $197 billion with the 2003 tax rate cut. But the actual capital gains revenues for that period were $330 billion, reflecting an error of 68 percent.

JCT and CBO made the same estimating errors for the 1997 capital gains rate cut, underestimating capital gains tax revenue by $217 billion in the first two years after the cut alone. But, inexcusably, the two agencies learned absolutely zero from the 1997 experience and went ahead with similarly ridiculous projections for the 2003 rate cuts.

The CBO also has recently made large errors in estimating total federal revenues. For 2004-2006, CBO underestimated federal revenues by an average of $85 billion a year, or a total of $255 billion over that three-year period. This has resulted in similarly large errors in estimating the budget deficits year after year.

These errors resulted because CBO refused to accurately estimate the effects of President Bush’s tax cuts during those years. While the tax cuts were projected to lose $382.6 billion during those years, higher economic growth resulting from the cuts produced $196 billion in unestimated additional revenue. So the net revenue loss from the tax cuts was only $186.6 billion, less than half the official estimate.

These errors are not random. They are consistently biased against tax cuts, grossly overestimating the revenue loss. We have voluminous experience now with the positive economic effects of tax cuts producing a revenue feedback that sharply reduces the expected revenue loss, going back at least to the Kennedy tax cuts in the early 1960s. JCT and CBO need to draw on that experience to produce more accurate estimates.

But it is not only tax cuts that are wildly misestimated. We see similarly wild errors in spending estimates. CBO estimated that the average premium for seniors for private sector coverage under the Medicare Part D prescription drug plan would be $38 per month. But in the first year it was $24, and this year it will be $22, reflecting a 72 percent error. The cost to the government for this program is now projected to be $136 billion less for 2007 to 2013 than CBO estimated when the legislation was passed, an error of 26 percent.

In another case, a bill that would have begun a nationwide electronic database for health records failed because of CBO cost estimates. CBO refused to consider the money such electronic records would save Medicare and Medicaid, and the greatly improved health for many Americans, that would result from eliminating prescription drug errors through that database.

Estimates from these agencies are consistently biased against any free-market reform, failing to consider the benefits of competition, incentives and other pro-growth effects. All these errors result from the extreme leftward bias of these agencies.

Congress cannot make good policy for the American people if it has wildly erroneous estimates of the effects of alternative proposals. In particular, the current extreme biases of JCT and CBO mislead the Congress into overtaxing the American people, reducing economic growth, jobs, wages and incomes. They also mislead Congress into accepting policies that produce excessive, unnecessary and counterproductive government spending.

The current heads of JCT and CBO need to correct the long, sorry record of their agencies in producing wildly erroneous and extremely biased estimates of the impact of proposed legislation. If not, the current leadership of those agencies and much, if not most, of their current staffs will have to be replaced.

Newt Gingrich is the former Speaker of the House. Peter Ferrara is director of entitlement and budget policy for the Institute for Policy Innovation, a senior fellow at the Free Enterprise Fund and general counsel at the American Civil Rights Union.