The President’s Tax Panel Should Dump “Static” Revenue-Estimating

A coalition of more than 40 free-market leaders, including The Competitive Enterprise Institute, has asked President Bush to direct the Advisory Panel on Federal Tax Reform to adopt “reality-based” revenue estimating methodology.  Currently, the panel is using “static” revenue estimating techniques. But these estimates assume that tax policy changes – regardless of their magnitude – have no impact on the economy’s performance. As such, these “official” estimates commonly overstate both the amount of tax revenue that will be generated by tax increases and also exaggerate the amount of revenue the government will “lose” because of tax rate reductions. This “static” methodology has been widely criticized because it provides policy makers with inaccurate numbers and creates a bias against lower tax rates. Dynamic analysis – sometimes referred to as “reality-based scoring” – acknowledges that taxes do affect the economy. Dynamic scoring recognizes, for instance, that higher tax rates discourage work, saving, and investment, and therefore will not raise the amount of money suggested by static estimates.

September 28, 2005

The President

The White House

1600 Pennsylvania Avenue, NW

Washington, DC 20500

Dear Mr. President:

We the undersigned share the hope that the work of the President’s Advisory Panel on Federal Tax Reform will be of historic value in fundamentally reforming our Nation’s moribund federal tax system. We applaud the direction given in your January 7th Executive Order, which ordered the Panel to develop options that “promote long-run economic growth and job creation, and better encourage work effort, saving, and investment ….” However, we have become deeply concerned that this directive is being undercut, and the work of the Panel needlessly compromised, by the use of “static” estimates on reform alternatives.

Economists agree with the basic economic premise that the type of tax reform chosen can profoundly affect our national prosperity. Nevertheless, the revenue neutral rate estimates provided to Panel members by the Office of Tax Analysis (OTA) of the Treasury Department knowingly fail to account for economic growth effects of tax reform alternatives. By failing to consider how the options affect economic growth, such static estimates prevent the Panel from considering how well or how poorly policy options achieve the primary charge on which the Panel’s existence is based.

The failure to take dynamic effects into consideration is welcomed by the adversaries of reform, because it supports political rather than scientific ends. Static estimates overestimate revenue gains from tax regimes with steeply progressive rates that doubly and trebly tax savings and investment, and they artificially ensure high revenue neutral rates for the most pro-growth reform alternatives. By systematically providing incorrect or inaccurate information to the Panel, such estimates will hamstring the Panel in its efforts to develop reform proposals that truly benefit the American people. Notwithstanding the protestations of OTA estimators, such estimates can be done, are done regularly in the private sector.

We urge you to direct the Panel to use “dynamic,” “reality-based” revenue estimating methodology so that the impact of the tax system on the incentives to work, save and invest is properly considered. We urge you to ensure that the methodology chosen acknowledges the reality that the U.S. economy is an “open” economy where capital can flow to and from the U.S. and where goods and services cross international borders. We urge you as well to direct the Panel to adopt longstanding recommendations of the Council of Economic Advisers, contained in the Economic Report of the President, to measure the distributional impact of tax reform alternatives as a function of taxes paid over lifetime income or consumption. Just as static estimates favor the current regime, distributional measurements of taxes paid over annual income disfavor pro-growth alternatives.

Sincerely,

60 Plus Association, James L. Martin, President

American Conservative Union, David A. Keene, Chairman

Americans for Fair Taxation, Leo E. Linbeck, Jr., Chairman

American Family Business Institute, Dick Patten, Executive Director

American Legislative Exchange Council, Duane Parde, Executive Director

Americans For Prosperity, Michelle L. Korsmo, Executive Vice President

American Shareholders Association, Daniel Clifton, Executive Director

Americans for Tax Reform, Grover Norquist, President

American Producers Council

Argus Group, David R. Burton and Dan R. Mastromarco

William W. Beach, Director, Center for Data Analysis, The Heritage Foundation*

Center for Freedom and Prosperity, Andrew Quinlan, President

Center for the Advancement of Capitalism, Nicholas Provenzo, Chairman

Center for Global Economic Growth, Richard W. Rahn, Director General

Citizens Against Government Waste, Tom Schatz, President

Club for Growth, Pat Toomey, President

Competitive Enterprise Institute, Fred Smith, President

Discovery Institute, Bruce Chapman, President

Ethan Allen Institute, John McClaughry, President

Free Enterprise Fund, Lawrence A. Hunter, Vice President and Chief Economist

FreedomWorks, Matt Kibbe, President

Galen Institute,Grace-Marie Turner, President

Independent Women’s Forum, Nancy M. Pfotenhauer, President

Institute for Policy Innovation (IPI), Tom Giovanetti, President

Institute for Research on the Economics of Taxation, Stephen J. Entin, President

Iowans for Tax Relief, David M. Stanley, Chairman

Kansas Taxpayers Network, Karl Peterjohn, Executive Director

Lone Star Foundation, David A. Hartman, Chairman

Mackinac Center for Public Policy, Michael LaFaive, Director of Fiscal Policy

Maryland Taxpayers Association, Inc., Richard Falknor, Executive Vice President

Dan Mitchell, Heritage Foundation*

National Center for Public Policy Research, Amy Ridenour, President

National Small Business Association, Todd McCracken, President

National Tax Limitation Committee, Lewis K. Uhler, President

National Taxpayers Union, John Berthoud, President

George A. Pieler, Former Tax Counsel, Senate Finance Committee*

Public Interest Institute, Dr. Don Racheter, President

Veronique de Rugy, American Enterprise Institute*

Small Business & Entrepreneurship Council, Karen Kerrigan, President & CEO

Small Business Association of Michigan, Rob Fowler, President

Taxpayer Protection Alliance, Lori Klein, President

Taxpayers League of Minnesota, David M Strom, President

Tennessee Tax Revolt, Inc., Rick Durham, President

United States Chamber of Commerce