The Economics Section - Page A4
January 23, 1997 Congress Adopts Supply-Side Economics
by Staff Journalists, The Daily Republican Newspaper
Related Stories:
WASHINGTON DESK - The Congress' Joint Committee on Taxation announced important changes in U.S. tax policy, this week.
Some of the nation's best economists attended the meeting and discussed dynamic scoring methods first introduced by president Ronald Reagan(R) for estimating federal revenues.
This week following the second inaugural of William Jefferson Clinton(D) there was a consensus that such methods are feasible and would improve the revenue-estimating process. It was a clear victory for conservatives who have been advocating dynamic scoring since the 1970s.
Under the Clinton administration's past methods of determining economic effects of tax policy, the full impact of tax changes on federal revenues has excluded macroeconomic effects.
Macroeconomic effects influence such things as real GDP growth, unemployment and inflation. However, when Congress drafted tax legislation in 1993 for the retro-active income tax increase, there were clearly deep macroeconomic impacts that Clinton & the Democrat controlled Congress failed to consider.
This has been the fundamental problem with Clinton economic assumptions: the revenue estimates produced by Clinton's Treasury tend to overstate the rise in revenue from a tax increase and overstate the loss of revenue from a tax cut.
This faulty thinking results from the failure of the Clinton economic assumptions to include the Macroeconomic effect creating a bias by Clinton's economic advisors.
When the GOP took over the House and Senate this week they moved to make the needed changes to adopt the much needed Macroeconomic effect as the highest priority for the new legislative session.
Under the leadership of Tom Campbell(R), the House voted to approve legislation that would force the Joint Committee on Taxation to use dynamic scoring under limited circumstances. This legislation died in the last Congress, but on January 7 the House amended its rules to include a provision allowing the chairman of the Ways and Means Committee to request a dynamic revenue estimate from the JCT on major tax bills.
The JCT also needs some generally agreed-upon method for actually producing such an estimate. Last week's conference grew out of a yearlong effort by the JCT, working with many of the nation's best economic modelers, to develop such a method.
These economic theorists are academics and professional forecasters. Economists like Alan Auerbach of the University of California, Laurence Koltakoff of Boston University and Dale Jorgenson of Harvard. Entities like DRI/McGraw-Hill, Macroeconomic Advisers, and Coopers & Lybrand also support the change.
Any economics theorists who use complex mathematics and computers to simulate the economic effects of tax changes, were asked to model two alternative tax-reform proposals. First was a comprehensive income tax, of the type long championed by liberal tax reformers at the Brookings Institution. Second was a flat-rate tax on consumption, such as those proposed by Dick Armey(R) and Forbes magazinepublisher Steve Forbes.
Under a consumption tax, businesses are allowed an immediate write-off for capital investments, whereas under the comprehensive income tax they must depreciate such assets over their useful lives. [Note: consumption taxes, like a national sales tax, or a value-added tax or a tax on income less savings and investment.] The economics theorists were all given other basic assumptions so as to make the results as comparable as possible.
Every economics model showed significantly more positive economic effects from adoption of the flat-rate consumption tax than from the comprehensive income tax.
This would seem to lay to rest the long-running debate over whether we should move toward a consumption tax or broaden the current income tax and lower the rates. Clearly, we must adopt the consumption tax if we want a larger economy.
The Conference concluded that higher growth resulting from adoption of a consumption-based tax system will allow the same revenue to be collected at a lower tax rate. The Wall Street Journal reported Wednesday that the economics model developed by Auerbach, Kotlikoff, Kent Smetters and Jan Walliser showed a long-run comprehensive income tax rate of 25% being necessary to collect the same revenue as a 22.4% consumption tax rate.
In another economics model developed by Jorgenson and Wilcoxen showed a flat-rate consumption tax of between 18% and 19% yielding the equivalent of current revenues.
Bill Archer(R), chairman of the Ways and Means Committee will now prepare a request for a dynamic macroeconomic effect estimate on the next tax bill that is introduced.