Heritage Foundation Leadership for America

I. The Current Situation

Revenue estimates state the changes in expected revenues associated with changes in the tax law. Thirty years ago, they were an afterthought in the process of formulating tax policy. Today, due to a series of laws designed to contain federal spend­ing,[1] revenue estimates occupy center stage—the numbers can make or break otherwise worthy tax initiatives.

Meanwhile, there have been some very signifi­cant improvements in revenue-estimating tech­niques.[2] As a result, revenue estimators are better positioned today to produce both dynamic scores that take economic feedback effects into account and improved distributional estimates that show the impact of tax changes by income class. Other changes include the use of linked spreadsheets, more powerful computers, and multi-year tax models using longitudinal data.

Despite these developments, the revenue-esti­mating process is nearly as much a mystery today as it was when estimates were much less important policy desiderata. Now and then, a ray of sunshine gets thrown on the estimating pro­cess, but in general, it remains shrouded in secrecy.

This paper examines the pros and cons of this ongoing secrecy and concludes that it is time to consider some modest changes that, on balance, will make the estimating process more transpar­ent. Enhanced transparency, in turn, should make it possible to begin addressing other reve­nue-estimating issues that demand attention.[3]

Transparency Differences Between Agencies

The staffs of three federal agencies prepare revenue estimates on a regular basis. They are, specifically:

• The OTA Staff. The Revenue Estimating Staff in the Office of Tax Analysis (OTA) in the U.S. Department of the Treasury[4] has about 13 financial economists who are supported by a separate eight-person modeling and com­puter applications staff.[5] In addition, OTA’s individual, business, and international staffs assist with revenue estimates in their areas of expertise.
• The JCT Staff. The revenue-estimating staff of the congressional Joint Committee on Taxation (JCT)[6] has about 16 economists and senior economists, as well as five supporting statisti­cal and computer specialists.[7]
• The CBO Staff. The Budget Analysis Division in the Congressional Budget Office (CBO) has approximately 45 analysts in four operating units who prepare spending projections and cost estimates for legislation. In addition, the CBO’s Tax Analysis Division has about 11 tax analysts, as well as managers and supporting staff, who estimate future tax receipts and pre­pare studies of the U.S. tax structure.[8]

Although there are three revenue-estimating staffs, only two estimates are typically prepared with respect to a given tax proposal: one by Trea­sury and the other by either the Joint Committee or the Congressional Budget Office. As explained in more detail later in this paper, revenue estimates from the Joint Committee relate to individual and corporate income taxes, Social Security and Medi­care taxes, estate and gift taxes, and excise taxes. Budget Office revenue estimates relate to tariffs, offsets, and user charges.

OTA and JCT (or CBO) revenue estimates become important at different stages of the legislative pro­cess. Treasury estimates matter when the President’s budget is being prepared or when a tax proposal is being readied by Treasury for submission to Con­gress. Later, during the consideration of a tax bill, Joint Committee estimates become critical, espe­cially if the tax-writing committees are required to hit congressionally mandated budget targets. Still later, if Treasury recommends a veto, Treasury esti­mates will be used to advise the President.

With respect to estimating transparency, there are some important differences between OTA, the JCT, and the CBO. Of the three, the Congressional Budget Office is the most willing to make informa­tion public regarding its revenue-estimating meth­odology. The reasons for this are discussed later in this paper.

In contrast, the OTA staff at Treasury is very secretive. As one former senior economist in the current Bush Administration observed of the Trea­sury staff, “They are discouragingly non-transpar­ent even to folks within Treasury.”

Similar comments abound on Capitol Hill with respect to the JCT estimating staff. However, the JCT staff has been consistently more open than Treasury in some significant ways, which will be described below.

What Does Transparency Mean?

This paper focuses primarily on the technical process of preparing revenue estimates by assem­bling data and making assumptions and calcula­tions at the staff level. It focuses only secondarily on the process by which staff estimates are reviewed and sometimes changed by senior staff and political officials.

Transparency in the technical revenue-estimat­ing process at the staff level means different things to different people. Depending on how transpar­ency is defined, individuals can easily find them­selves on opposite sides of the debate over whether greater transparency is a good idea.

The following are some of the possible compo­nents of the transparency concept as applied to the revenue estimates prepared by federal agencies:

Generalized Transparency

1. Publishing written explanations describing how, in general, an agency prepares revenue estimates. Variations on this theme include publishing focused explanations relating to specific topics such as capital gains estimating methodology.
2. Sponsorship of occasional conferences or sem­inars at which revenue estimators describe their work, provide illustrations, and solicit comments from peers.
3. Publication of source data—such as the Inter­nal Revenue Service’s Statistics of Income[9] or the IRS tax return “public-use file”—that can be used by private organizations to make their own revenue estimates.
4. Publication of retrospective analyses of the accuracy of prior revenue estimates in the lim­ited instances[10] in which this is possible.

Specific Transparency

5. Preparation and release of written explanations describing how a specific revenue estimate was done.
6. Release of the assumptions that were made by an estimator when doing a specific revenue estimate, including the behavioral assumptions (i.e., expected changes in taxpayer behavior consequent on a change in taxation).
7. Listing the sources of data that were used in making a specific revenue estimate, including any links to publicly available data.
8. Description of the spreadsheets or simulation models used in doing a specific estimate, including any use of specialized software.
9. Release of the spreadsheet or computer simula­tion model output files underlying a specific revenue estimate, preferably in electronic form, and any off-model adjustments made to the output files.
10. Release of the non-privileged elements of the simulation models themselves.
11. Release of the actual data used in making a specific revenue estimate to the extent that this can be done without jeopardizing taxpayer pri­vacy or business confidentiality.

Which of these components we include in our definition of transparency depends on our goals. If the goal is to permit “accuracy checking” through full replication and validation of a spe­cific revenue estimate, our definition of transpar­ency should include all 11 of these general and specific components. If, in contrast, the goal is to acquire a general understanding of how revenue estimates are done, the components listed under “Generalized Transparency” are sufficient.

The goals of most requests for revenue-esti­mating transparency fall between these two extremes. For some individuals, it is sufficient to know how estimates are prepared and to be assured that the estimates are honest and reliable. For them, generalized transparency is usually adequate. But for scholars, researchers, and tax professionals, more than generalized disclosure is needed, and at least some of the components of “Specific Transparency” should be made available to these individuals.

Sources of Transparency Guidance

Revenue estimates are related more or less directly to several other types of government fore­casts. While each type of forecast can be distin­guished from the others, transparency practices developed with respect to one type are often instructive when determining the degree of trans­parency that is appropriate for other types. Accordingly, this paper takes into account the transparency practices that apply to all of the fol­lowing forecasts:

• Baseline Receipts Estimates. Baseline receipts estimates indicate the expected reve­nues under current law for a specified time period, such as five or 10 years.
• Baseline Economic Estimates. Baseline eco­nomic estimates forecast major economic vari­ables, including gross domestic product, unemployment, inflation, and interest rates, for a specified time period.
• Distributional Estimates. Distributional esti­mates, such as those prepared by the Treasury and Joint Committee revenue-estimating staffs, indicate the financial impact, by income class, of changes in the tax laws.[11]
• Cost Estimates. Cost estimates, such as those prepared by the Congressional Budget Office and Office of Management and Budget, project the fiscal effects of spending bills.
• Revenue Estimates. Revenue estimates (the subject of this paper) are forecasts indicating the expected change in tax payments resulting from a change in the tax law.

One must be cautious, however, when applying transparency practices developed in one of these forecasting areas to other types of forecasts or esti­mates. Baseline estimates, for example, are few in number and attract considerable public interest. In contrast, thousands of cost and revenue estimates are prepared each year, and the public is generally interested in only a few of them. This makes it important to think in cost-benefit terms about the amount of detail to be provided when making cost or revenue estimates public. In-depth documenta­tion is appropriate for baseline estimates, but run-of-the-mill revenue estimates ordinarily demand only brief explanations.

Nevertheless, if one keeps this caveat in mind, there are useful lessons to be learned for the reve­nue-estimating process from studying transpar­ency practices in all the areas listed above.

The Transparency Situation Today

No matter how transparency is defined, reliable, official information about the U.S. Treasury reve­nue-estimating process is insufficient to provide even a rudimentary understanding of that process.

In contrast, since 1990, the Joint Committee on Taxation has published a series of documents describing its revenue-estimating procedures, has held several revenue-estimating conferences open to private-sector invitees, and has established an advisory panel of private revenue-estimating experts. In almost all cases, however, the technical foundations for specific Joint Committee estimates remain shrouded in secrecy.

Meanwhile, thanks to a congressional disclosure mandate,[12] Congressional Budget Office estima­tors are relatively open regarding the basis for their baseline and cost estimates, and the staff in general has an accepting attitude toward public disclosure. But, although it is clearly better than the JCT or Treasury when it comes to transparency, profes­sional observers state that the CBO is definitely not laying out all the details that underlie its forecasts.

The Treasury Staff

Treasury has published almost nothing that offi­cially describes its revenue-estimating procedures. However, Treasury economists familiar with reve­nue-estimating issues have created a fairly signifi­cant body of unofficial, scholarly revenue-estimating research over the years, some of it writ­ten after the authors had left Treasury for other employment.[13]

About 15 years ago, the Treasury revenue-esti­mating staff compiled an internal document known as the “Revenue Estimating Handbook,” a loose-leaf compilation of documents that was designed to introduce newly hired employees to their work.[14] This handbook was never published or released to the public. Nor has it been updated.

As a result, the estimating staff today uses a 13-year-old article from Tax Notes magazine as an introduction to the revenue-estimating process for newly hired staff. The article, entitled “The Reve­nue Estimating Process” was authored by Emil M. Sunley, a former Deputy Assistant Secretary for Tax Policy at Treasury, and Randall D. Weiss, a former Deputy Chief of Staff of the Joint Committee on Taxation.[15] By the time their article was written, both had entered the private sector.

Although Treasury has not published an official description of its revenue-estimating process, it has released an excerpt from its internal revenue-estimating “briefing book”[16] in response to a 1990 Freedom of Information Act request from Tax Ana­lysts, a nonprofit publisher. The Treasury briefing book discusses such topics as the use of revenue estimates, deadlines, general estimating methodol­ogy, the data and models used in revenue esti­mates, the conventions employed, and relations with outside estimators including the Joint Com­mittee on Taxation and “Lobbyists/Accounting Firms.”

The briefing book discussion also sets forth[17] Treasury’s rationale for limiting the amount of reve­nue-estimating information that is released to the public. The following is quoted from that discussion:

• “Estimates are often made on short notice and a great deal of experience and judgment is required.”
• “Estimates frequently involve novel ideas where there is little or no data, no previous experience to draw upon, no studies to refer to, indeed nothing available but the estimator’s past experience. Making this public will not result in better estimates and will hamper efforts to take advantage internally of the esti­mator’s input.”
• “Public release of detail allows interested parties to criticize those elements of the estimate favor­able [sic] to them and conveniently overlook issues on the other side. Only biased criticism results and the estimate is not improved.”

Although Treasury has not produced any pub­lished, official description of its revenue-estimat­ing processes and is reluctant to release information about that process, two OTA Papers have touched on aspects of the subject in recent years.[18] The first, “U.S. Treasury Distributional Analysis Methodology” (OTA Paper 85), appeared in September 1999, shortly before Treasury reduced distributional analyses to “insignificant levels.”[19] The second, “Defining and Measuring Marriage Penalties and Bonuses” (OTA Paper 82– Revised), appeared in November 1999 and it pro­vides insights into Treasury’s estimating techniques relating to the consequences of filing tax returns as a couple rather than as individuals.

An earlier staff-originated resource is the “Com­pendium of OTA Papers,” edited by OTA members Don Fullerton and Thomas S. Neubig and written after enactment of the Tax Reform Act of 1986.[20] That compendium sought, among other things, to make the Treasury revenue-estimating process more transparent. It included numerous articles explaining how Treasury prepared the revenue and distributional analyses required in connection with the 1986 Act.

A potentially significant Treasury revenue-esti­mating paper authored by John McClelland, a Financial Economist on the Treasury’s Revenue Estimating Staff, was scheduled for presentation in the fall of 2003 at the annual meeting of the National Tax Association (NTA) under the work­ing title “Corporate Integration: Description of Revenue Estimating Methodology.” However, for reasons that are not clear, it was not presented. If the paper had appeared, it would have described the issues involved in estimating the revenue loss attributable to the President’s January 2003 divi­dend exclusion proposal. According to Treasury, the paper may appear at an unspecified later date as an OTA Paper.

As an executive branch agency, the Treasury Department is subject to the disclosure provisions of the Freedom of Information Act (FOIA). How­ever, with one exception, Treasury has not been required under the FOIA to release any informa­tion regarding specific revenue estimates.

That exception relates to a case brought by the American Society of Pension Actuaries in 1990. In that case, the Society sought release of the Trea­sury’s “assumptions and calculations” underlying an estimate that a shift in pension-related enforce­ment practices would generate $666 million in new revenue. The U.S. District Court for the Dis­trict of Columbia ordered release of the relevant documents because:

the estimate they produced became part of the President’s Budget. By estimating that the IRS could generate $666 million in revenue by shifting its enforcement practices, the government adopted as its official policy the calculations and assumptions underlying this estimate…. Because [those] documents…contain analytic backup for the government estimate, they “embody the agency’s effective law and policy” and therefore are not protected [from disclosure]….[21]

The government did not appeal the Pension Actu­aries decision, but that hardly constitutes acquies­cence in its result. Currently, the Treasury is resisting—or at least delaying action on—a Free­dom of Information Act request[22] filed by Tax Ana­lysts for documents underlying the Treasury’s $364 billion cost estimate relating to the President’s Janu­ary 2003 dividend exclusion proposal.[23]

Oversight of the Treasury revenue-estimating pro­cess is the responsibility of the managers who direct the Office of Tax Analysis in the Office of the Deputy Assistant Secretary for Tax Policy (Tax Analysis). They have the professional skills needed to keep tabs on the revenue-estimating staff, which is one of five under their direction,[24] and they provide expect­able, routine guidance. Individual revenue estimates are reviewed by these managers, as are other papers and memorandums generated by the OTA staff.

In the past 15 years, there have been two exter­nal reviews of the Treasury revenue-estimating process by other executive branch agencies. Alan Greenspan of the Federal Reserve Board con­ducted the first around 1990. The second, in 2001, was undertaken by the President’s Council of Economic Advisers and apparently resulted from concern by then-Council member Laurence Lindsey that Treasury might be underestimating the beneficial effects of tax cuts. Neither of these estimating reviews was ever publicly announced, nor have the results been published.

With these two exceptions, there is no evidence that the estimating staff has been subjected at any point within the past generation to an in-depth, internal examination of its procedures, techniques, and estimating consistency (as contrasted with routine supervision).

Public oversight of the Treasury’s revenue-esti­mating process is not currently possible as a sup­plement to any official, internal oversight that may occur. As outlined earlier, Treasury provides almost no official information about how it does revenue estimates, and none at all about the basis for particular estimates. Given that fact, effective monitoring by outsiders is currently impossible. For this reason, interested members of the public are unable to perform “trust-but-verify” reviews of the Treasury revenue-estimating process.

The Joint Committee Staff

The Joint Committee on Taxation has been engaged in some form of revenue estimating almost since its inception in 1926. When the 1974 Budget Act became law, a decision was made to enhance the JCT’s revenue-estimating capability. Treasury’s individual income tax estimating model was made available to the JCT soon thereafter. Fol­lowing the hiring of two former Treasury revenue estimators, the JCT gained access to Treasury’s cor­porate income tax model as well.[25]

The JCT revenue-estimating process operated completely out of the public eye until the late 1980s, at which point the Joint Committee on Taxation began to publish a series of documents describing its revenue-estimating processes, thus providing a welcome amount of generalized transparency.

The Capital Gains Confrontation. The first of these documents appeared in March 1989.[26] In it, Joint Committee Chief of Staff Ronald A. Pearlman briefly discussed why the revenue-estimating staffs at Treasury and the Joint Committee had produced widely divergent revenue estimates relating to a proposal by the Administration of President George H. W. Bush to reduce capital gains tax rates.

On March 6, 1990, the Senate Finance Commit­tee held a hearing[27] to investigate the reasons for these differences in the Treasury and Joint Com­mittee estimates regarding the Administration’s gains tax proposals. Treasury had estimated that, by spurring gains realizations, the Administration proposal would increase federal tax receipts by $12.5 billion for the fiscal years 1990–1995. Meanwhile, the Joint Committee estimated that the proposal would reduce federal revenues by $11.4 billion in the same time frame.

The hearing revealed a number of unresolved disparities in the estimating assumptions made by the two staffs. It also made clear that the principal reason for the $23.9 billion disparity in the esti­mates lay in relatively small differences in the underlying behavioral assumptions used by the Treasury and Joint Committee staffs.

In conjunction with the Senate Finance Com­mittee’s March 1990 hearing, the Joint Committee published its Explanation of Methodology Used to Estimate Proposals Affecting the Taxation of Income from Capital Gains.[28] That report described the revenue-estimating process in general terms and provided specific detail with respect to the Joint Committee’s approach to gains estimates. It then analyzed the differences between the Joint Com­mittee and Treasury approaches to the capital gains issue, including the differing assumptions about the likely behavioral responses to a cut in gains rates.

Treasury was also active in publishing materials relating to capital gains revenue-estimating issues. Starting in May 1989, it released a series of OTA Papers detailing several different methodological and data approaches to estimating the effects of gains tax changes.[29]

No one can read the JCT’s 1989 and 1990 docu­ments on the gains tax estimation issue and the Treasury’s 1989 OTA papers and March 6, 1990, Senate Finance testimony on the same subject[30] without acquiring a better understanding of both the revenue-estimating process in general and the importance of assumed behavioral responses in that process.

The 1989–1990 gains tax confrontation was “destructive,” in the view of one Joint Committee observer, because it created considerable acrimony between the Treasury and Joint Committee reve­nue-estimating staffs, which theretofore had gener­ally worked cooperatively on estimating chores. At the same time, however, it demonstrated the abil­ity of full disclosure to dispel suspicion and dis­trust resulting from conflicting revenue estimates.

Descriptions of Methodology. Two other Joint Committee revenue-estimating reports also appeared in the early 1990s. Discussion of Revenue Estimating Methodology and Process, published in 1992, provided a definitive general overview of the procedures used by the JCT when making revenue estimates, including distributional analyses.[31] Part II provided answers to common questions asked by Members of Congress, who are the principal consumers of JCT estimates. Those questions and answers cover a wide variety of issues. The Q&A functions, in effect, as an estimating procedures manual for the JCT.

The following year, the Joint Committee pro­duced a document dealing with distributional analysis and methodology.[32] It has become known as “the Red Book.” Although thoughtfully written, only a single distributional table was prepared using its methodology.[33] Thereafter, the proposed methodology was not used again because the JCT estimating staff failed to reach an ongoing consen­sus about how to implement it.[34]

A more recent description of the JCT’s overall estimating methodology is set forth in May 2002 testimony before the House Ways and Means Over­sight Subcommittee by Lindy Paull,[35] who was then Chief of Staff of the Joint Committee. This tes­timony provides a brief but useful JCT revenue-estimating overview and history, and includes an “Attachment” that lists 15 Joint Committee “Reve­nue Estimating Methodological Publications” that appeared between 1990 and 2001. However, the main focus of the Paull testimony is on the feasibil­ity of incorporating the macroeconomic effects of tax law changes into JCT revenue estimates. That topic is discussed in the next section.

Dynamic Scoring. Since the appearance of the Red Book more than 10 years ago, most of the rev­enue-estimating information released by the Joint Committee on Taxation has focused on the issue of “dynamic scoring,” which is the phrase used to describe the incorporation of macroeconomic effects into the assumptions underlying revenue estimates.

The principal macroeconomic aggregates that relate to dynamic scoring are gross domestic prod­uct, aggregate investment, interest rates, the over­all price index, and the total level of state and local taxes.[36] In ordinary revenue estimates, these “baseline aggregates,” which are supplied to the JCT by the CBO, are assumed to remain unchanged by proposed tax law changes. Hence, any “feedback effects” on revenue attributable to changes in these aggregates are excluded from the revenue estimate. For that reason, these estimates are sometimes called “standard” or “static” esti­mates. In contrast, a dynamic revenue estimate relating to a tax proposal includes both the pro­posal’s initial revenue effects and the feedback effects on revenue attributable to the likely changes in the baseline economic aggregates due to enactment of the proposal.[37]

Dynamic scoring involves more than merely considering the behavioral effects of tax changes. Revenue estimators at Treasury and the JCT have always taken behavioral effects into account[38] in revenue estimates whenever they had some basis for predicting those effects. As a former JCT chief of staff recently pointed out, the JCT has never prepared truly “static” revenue estimates that dis­regarded behavioral effects. Instead, he states, the JCT now prepares both “standard” estimates (which take behavioral effects into account when­ever possible) and “dynamic” scores (which take both behavioral effects and macroeconomic feed­back effects into account).

Use of dynamic scoring has been urged by sup­ply-side proponents of cuts in tax rates, who wish to take into account the beneficial effects of tax cuts on subsequent economic activity and thus on tax revenues.[39] Static or standard scoring, in their view, overstates the likely revenue losses attribut­able to tax cut proposals by omitting subsequently generated revenue attributable to the additional economic activity induced by the tax cut. Those who view dynamic scoring less enthusiastically point to the uncertainties associated with properly modeling feedback effects.[40]

The year 1995 was a watershed in the Joint Committee’s approach to dynamic scoring. The year began with an unusual joint hearing con­ducted on January 10 by the House and Senate Budget Committees.[41] The purpose of the hearing, in the words of House Budget Committee Chair­man John R. Kasich (R–OH), was “to consider the role that static versus dynamic scoring plays in promoting or hindering accurate assessment of the costs and benefits of policy options before the Congress.”[42] The hearing was inspired by Republi­can demands that dynamic scoring techniques be applied to evaluate the likely economic effects of the “Contract With America” that formed the Republican legislative agenda for the first 100 days of the 104th Congress.

The hearing featured a distinguished panel of witnesses from the private sector[43] in addition to representatives of the JCT and CBO.[44] The wit­nesses, whose views spanned the political spec­trum, generally agreed that, in theory, revenue estimates would be more accurate if they included the feedback effects of tax changes on the basic macroeconomic aggregates. Except for Dr. Martin Feldstein of Harvard, they also agreed that there were serious practical and theoretical hurdles to overcome before macroeconomic feedback effects could be included in revenue estimates.[45]

The Senate Finance Committee held a hearing on January 24, 1995, that produced similar con­clusions regarding the feasibility of using dynamic revenue-estimating techniques. As a result, Finance Committee Chairman Bob Packwood (R– OR), announced on January 24, 1995, that reve­nue estimates would remain “static” for the time being. Packwood said the message he had received from witnesses was “be careful, don’t go wild.”[46]

Subsequent to these hearings, the JCT continued to work on the dynamic scoring issue. These efforts came to fruition on May 8, 2003, when a floor state­ment by House Ways and Means Committee Chair­man William M. Thomas (R–CA) made public a detailed description by the Joint Committee of the steps it had taken to provide a dynamic estimate of the revenue costs of H.R. 2, which contained Presi­dent George W. Bush’s 2003 tax cut proposals.[47] This was the Joint Committee’s first full-blown dynamic analysis. Its release came in response to the January 7, 2003, adoption of House Rule XIII.3.(h)(2),[48] which required a “macroeconomic impact” analysis of major tax legislation.

That Joint Committee floor-statement explana­tion discussed the three economic models used in preparing the JCT’s dynamic estimate, described the estimators’ assumptions regarding federal fis­cal and monetary policy, outlined the behavioral response assumptions made by the estimators, and set forth the estimators’ simulation results including the probable changes in economic growth, labor supply, and employment. It also described the likely budgetary effects of the pro­posals under review and listed the data sources used by the estimators.

Subsequently, on December 22, 2003, the Joint Committee published an expanded version of its May 2003 analysis of the macroeconomic effects of H.R. 2.[49] The December report also contained a history and description of the Joint Committee’s macroeconomic modeling work and a description of the dynamic scoring activities of its “Blue Rib­bon Advisory Panel.”

Transparency Efforts. The JCT squarely addressed the issue of revenue-estimating trans­parency in a May 18, 1995, press release,[50] in which the committee announced that it was taking steps to “open up the estimating process so that the public has a better understanding of the assumptions and procedures used….” The press release also said that the Joint Committee would establish an advisory board “to improve the esti­mating process and estimating methodology.” The release added that the JCT would begin to include “information about the behavioral assumptions” in its estimates, provide a “description of significant potential macroeconomic effects” of tax proposals, and make public “aspects of its primary [estimat­ing] models which do not include confidential tax­payer information.”

The Joint Committee’s May 18 press release was accompanied by two substantially identical letters, also dated May 18, from Kenneth J. Kies, Chief of Staff of the JCT, to Bill Archer, House Ways and Means Committee Chairman, and Bob Packwood, Senate Finance Committee Chairman.[51] In addi­tion to the changes outlined in the press release, those letters stated that the JCT would begin to meet with “reputable outside economists” to dis­cuss the feasibility of actually “incorporating mac­roeconomic effects into our estimates” as contrasted with simply describing them. The let­ters also pledged to monitor the accuracy of the estimating process “by selecting several estimates to study over a period of years following enact­ment” and to institute a new inventory system “so that we can more efficiently process and monitor the progress of pending estimate requests.”

At the same time, however, the two May 18 let­ters cut back on some of the broad language in the JCT press release. For example, the letters indi­cated that most of the information listed in the JCT release would be prepared only if “requested by the Member of Congress submitting the revenue esti­mate request” and thus would not be available to the public unless the Member decided to release it.

Later in 1995, Joint Committee Chief of Staff Kies authored a “Viewpoint” article in Tax Notes maga­zine,[52] in which he declared flatly that “the public knows too little about how the Joint Committee on Taxation prepares revenue estimates.” He went on to outline the initiatives then underway to begin “letting in the light on the estimating process while at the same time deflating the wrong and misleading statements about the estimating process.”

The 1995 Joint Committee initiatives mark the high-water point for JCT efforts to “open up” the estimating process. Nearly 10 years later, it is not clear how much those initiatives accomplished to promote transparency.

For example, it does not appear that the JCT has initiated a project “to monitor the accuracy” of its estimating process by “selecting several estimates” for retrospective analysis subsequent to enact­ment. If it has done monitoring of that sort, the results have not been made public.

The status of several of the other initiatives is also murky. In particular, it is not clear whether Members of Congress regularly request and receive information about modeling techniques or macro­economic effects. However, in a few instances, according to former JCT officials, Members of Con­gress have asked about—and been briefed on—the behavioral assumptions underlying estimates.

In addition, former JCT officials also confirm that the Joint Committee has now and then made public the basic elements of its estimating models, mainly in response to requests from major accounting firms.

Unlike Treasury, the Joint Committee is not required to disclose documents under the Free­dom of Information Act, but it is subject to a dif­ferent—and perhaps more effective—disclosure regime because it has “535 Congressional bosses” who can request both revenue estimates and sup­plementary information about how they were done. In addition, by working through a sympa­thetic Member of Congress, the lobbying commu­nity can obtain detailed information about Joint Committee revenue estimates. This type of disclo­sure is sometimes called “selective transparency.”

However, the existing Joint Committee restric­tions on disclosure of information relating to reve­nue estimates do have an impact on the general public, including students, academic researchers, and the press. Their access to specific revenue-esti­mating information depends to a large degree on how well-connected they are on Capitol Hill. Under existing selective transparency arrange­ments, if individuals lack political connections, they lack access.[53] Thus, outside review of the JCT revenue-estimating process—especially scholarly review—is frequently thwarted.

Advisory Boards. The advisory board announced in the Joint Committee’s May 18, 1995, press release became known as the “Blue Ribbon Advisory Panel.” It was composed of pri­vate-sector economists from both political parties and various political persuasions. Its status is murky, and it is not clear what work it has actually done. It appears that the panel has been largely inactive, except for three meetings in 2002 to con­sider dynamic scoring issues.

The Blue Ribbon Panel superseded an earlier Revenue Estimating Advisory Board, formed on April 18, 1989, at the request of Ways and Means Committee Chairman Dan Rostenkowski (D–IL), to consult with the Joint Committee revenue-esti­mating staff on econometric models, estimating methodology, and current academic research.[54]

From its inception, the Blue Ribbon Panel’s principal focus has been to assist the Joint Com­mittee in moving toward use of dynamic analysis. However, until 2002, the panel was not regularly called upon for advice. In that year, in response to a request from Ways and Means Committee Chair­man William Thomas, the panel met three times to review the Joint Committee’s dynamic scoring capability.

The original announcement of formation of the Blue Ribbon Panel envisioned use of the panel to review all aspects of the Joint Committee’s revenue-estimating work, but this review has not occurred. Nor has the panel met since it finished its series of three 2002 meetings on dynamic scoring.

Opinions differ about the Blue Ribbon Panel’s usefulness. A recent Joint Committee description of the panel’s activities paints a favorable picture,[55] but a private-sector observer who is a member of the panel states that its work has been “directed entirely” to the issue of dynamic scoring and that, while it has been “useful and influential” with respect to that subject, it has “not taken up” any other topics. Another knowledgeable private-sector revenue estimator describes the panel as a semi-moribund body whose chief function seems to be to provide the JCT with a response when the commit­tee is challenged on the need for enhanced public oversight over the revenue-estimating process.

In 1996, the Joint Committee also convened a group of macroeconomic modelers who had expe­rience in forecasting the economic effects of major tax initiatives. This “macro group” was separate from the Blue Ribbon panel discussed above. The modeling group worked with the Joint Committee staff to ascertain why different forecasting or simu­lation models produced varying results. The results of this effort were made public in a sympo­sium held in January 1997.[56] The Joint Commit­tee then set to work to develop a macroeconomic equilibrium growth model (MEG). The MEG, along with other models, can be used to produce a dynamic analysis of tax proposals and to estimate the effects of specific tax proposals on different groups of taxpayers.

The JCT and Congress. Relations between Members of Congress and the JCT are a problem­atic element in the revenue-estimating transpar­ency picture. Congress, acting through the Joint Committee on Taxation, is in full charge of the JCT revenue estimators. Congress is the revenue esti­mators’ employer and the party that has authority to oversee the estimating process, alter the rules, and implement changes.

Hence, if the Joint Committee is secretive about its revenue estimates, that fact reflects the will of Congress. Congress, acting through the JCT Chief of Staff, currently requires the revenue estimators to maintain confidentiality about leg­islative proposals and their related estimates. Even the existence of a request to the JCT for a revenue estimate is confidential,[57] and the resulting estimates are also confidential. Early in the history of JCT revenue estimating, the prac­tice emerged that estimates were released only to Members of Congress and that the Members could then release the estimates to the general public if they so desired.[58] Greater transparency for the JCT revenue-estimating process could threaten this custom; but even if this custom remains unchanged, it should nevertheless be possible to increase the degree of transparency for estimates that are part of a chairman’s mark or scored legislation.

Members of Congress now and then hide behind delays[59] in the revenue-estimating process when they really do not want to support a specific tax proposal but want to appear to do so. “We can’t move without a revenue estimate,” they tell advo­cates of the proposal. In addition, when Members wish to block a proposal, they sometimes attack it by claiming it is based on flawed or biased revenue estimates. The Joint Committee estimators find it difficult to defend themselves when they are used as whipping boys in these ways.

Oversight. The Members of Congress who comprise the Joint Committee seldom meet, and at no point have they conducted a meaningful inves­tigation into the quality of the work of the JCT rev­enue-estimating staff. Instead, Members’ interests in recent years have focused on questions relating to so-called dynamic scoring, which is the subject of a separate paper in this series. Beyond that, there has been no oversight of the JCT estimating process by the members of the Joint Committee.

As a result, the task of internal oversight has been left almost entirely to the Joint Committee Chief of Staff, who is usually trained as a lawyer or public administrator, not as an economist. This increases the difficulty of supervising economists working in an arcane area. Further, the Chief of Staff has duties that go far beyond review of reve­nue-estimating practices. Hence, for routine reve­nue estimates, the Chief of Staff “can obtain only a rudimentary understanding of the staff’s method­ology,” according to one former JCT revenue esti­mator. Detailed scrutiny is necessarily left to the revenue-estimating staff itself. For more controver­sial estimates, the Chief of Staff meets with the estimating staff and asks questions. However, this type of review falls short of consistent, ongoing oversight and quality control.

Moreover, there is no indication that this lack of oversight has been remedied to any degree by cri­tiques from individual Members of Congress, lob­byists, advisory groups, or the general public. Lobbyists and the Members of Congress with whom they work may ask questions about a reve­nue estimate with which they disagree; but once an estimate has been completed, it is generally dif­ficult or impossible to change,[60] especially when legislative time constraints are severe.

Almost never do discussions between lobbyists and revenue estimators amount to a thoughtful critique of estimating procedures, methodologies, and consistency. Lobbyists usually want to pro­duce a specific result, not necessarily the right result. Now and then, a lobbyist will share sugges­tions and insights privately, but private sugges­tions hardly amount to a thorough investigation of the quality of the work of the JCT revenue-esti­mating staff. A critique of that sort has yet to be conducted.

Operating Guidelines. The JCT revenue-esti­mating process is not governed by any statutes or published regulations,[61] as is the CBO process,[62] but there are internal guidelines that are prepared by the committee itself.

An example is set forth in Section II(A) of the Joint Committee’s Discussion of Revenue Estimation Methodologies and Process,[63] which, under the heading “Administrative Procedures,” discusses such questions as how estimates are requested, how the JCT staff decides which requests to answer, how Members of Congress can obtain fur­ther information, the confidentiality of estimates, the content of estimates, the time periods to which estimates relate, the criteria for doing re-estimates, and the participation of “outside parties” in the estimating process.

Because these guidelines are internal rather than statutory, they can be changed by the JCT when change seems appropriate. Thus, for example, the Joint Committee could decide to expand the num­ber of revenue estimates it publishes on the Web so as to include substantially all of its revenue esti­mates,[64] just as the CBO now does for substan­tially all of its legislative cost estimates.

Who Is Served by the JCT? The JCT’s revenue-estimating transparency obligations sometimes become muddled because it is not clear who should be served by the work of the JCT estimat­ing staff. Is the JCT staff working primarily for individual Members of Congress who “need a number” to facilitate introduction of tax legisla­tion, or should it be working primarily for the gen­eral public and satisfying the public’s need to know about government operations?

A facile answer is that the JCT estimating staff should be doing both things simultaneously, but sometimes these dual goals come into conflict. For example, as outlined earlier, the JCT maintains strict confidentiality about revenue estimates pre­pared at the request of individual Members of Congress. When preparing those estimates, the JCT operates, in effect, as a confidential profes­sional adviser to the individual Member of Con­gress who requested the estimate. Upon completion, the estimate effectively becomes that Member’s property, not the public’s, so the estimate is released only if the requesting Member so authorizes. As a professional adviser, the JCT regards itself as being in much the same position, vis-à-vis a Member of Congress, as a private attor­ney or accountant is in relation to a client.

A variation on this position is the claim that dis­closure of revenue estimates would have a chilling effect on the sound advice that the JCT currently provides to Members of Congress and that revenue estimates should therefore be protected from disclo­sure just as “attorney work product” is protected from disclosure in an attorney–client situation.

One problem with this argument is that revenue estimates relate to proposals that have the potential to become public laws. Once a bill is introduced, a revenue estimate is not simply a private matter between “attorney” and “client.” Instead, estimates are an important piece of information that the pub­lic needs to evaluate proposed public laws. Hence, even if estimates are kept confidential while legisla­tion is being developed, the JCT Web site should never lack a revenue estimate for an introduced bill. Secrecy for estimates should end when a tax bill is dropped into the legislative hopper.

A second problem with the attorney–client argument is that the existing practice of publishing the JCT’s revenue estimates with respect to chair­men’s marks and other scored legislation does not appear to have had any chilling effect on the frank­ness of the JCT’s advice. Surely, if any “chill” were to occur, it would occur in these cases.

A change in the JCT’s Member-centric orienta­tion is needed if the JCT is to achieve the same degree of revenue-estimating transparency as the Congressional Budget Office. Bringing about such a change will not be easy. Members of Congress clearly benefit from having a skilled professional staff to crunch numbers without having to release those numbers to the public if they prove embar­rassing. Under these circumstances, a Joint Com­mittee Chief of Staff will need strength, some courage, and the backing of supportive Ways and Means and Finance Committee chairmen to assert the public’s right to know against built-in congres­sional pressures favoring secrecy.[65]

In any event, the attorney–client argument has little relationship to other estimating disclosure issues such as publishing the assumptions under­lying revenue estimates, making estimating models available to the public, and providing sensitivity analysis for estimates.

The Congressional Budget Office Staff

Unlike either Treasury or the Joint Committee on Taxation, the Congressional Budget Office operates under statutory rules that require it to provide “the basis for each…estimate” and to make “informa­tion, data, estimates, and statistics” obtained from other agencies available for “public copying.”[66]

In obedience to this mandate, the CBO has developed a disclosure policy[67] that requires the agency “to disclose the basis for each budget and mandate cost estimate.” The policy statement says this includes “disclosure of the critical assump­tions and analytic methodologies used to prepare the estimate.” The statement also assures inter­ested persons that the CBO will supply “further details on request.”[68] Plainly, this approach is dif­ferent from the disclosure regime at Treasury or the Joint Committee.

However, the CBO’s basic estimating job is quite different from that of Treasury and the Joint Com­mittee. The CBO’s main job is to prepare baseline economic forecasts involving the major economic variables: gross domestic product, unemployment, inflation, and interest rates. It also prepares base­line receipts estimates. These forecasts constitute the guideposts in terms of which congressional committees, including the JCT, can compute the effects of changes in the tax law.

The CBO also develops cost estimates for most legislation, and the underpinnings for those esti­mates are published on the Web at www.cbo.gov/ CESearch.htm. However, in the case of legislation involving income, estate and gift, excise, and pay­roll taxes, the applicable law requires the CBO to use the estimates provided by the Joint Committee on Taxation.[69] CBO revenue-related analyses are limited to proposals involving tariffs, offsets, and user fees. Proposals in these three areas are gener­ally of minor importance to most tax practitioners.

There are some important differences between the CBO and the JCT when it comes to preparing tax-related revenue estimates. First, the JCT esti­mating staff has the advantage of immediate access to the tax attorneys on the JCT staff, who can help in significant ways to improve the accuracy of an estimate. The CBO lacks similarly prompt access to legal advice. “Having revenue estimators and tax attorneys working for the same boss helps to break down barriers” said one Washington think-tank economist familiar with both JCT and CBO esti­mating practices. “This is particularly true,” he added, “with respect to issues such as international taxation and depreciation.”

Second, the JCT estimating staff is often given much less turnaround time when preparing an esti­mate than is the CBO. JCT estimators are frequently called on to provide ballpark revenue estimates when Members of Congress are drafting legislation. In contrast, the CBO’s Tax Division is hardly ever called on to provide ball-park estimates. Similarly, in the course of a single drafting session, tax legisla­tion may undergo numerous permutations, thus requiring multiple JCT revenue re-estimates. In contrast, the CBO is not usually required to pro­duce on-the-fly estimates and is therefore able to focus on developing more carefully honed figures.

The Joint Committee routinely provides the CBO with very little information about the bases for its revenue estimates relating to tax bills. As a result, the CBO remains largely in the dark, just like the general public, about the underpinnings for the Joint Committee’s revenue estimates.

Because the CBO’s basic job is to forecast the major economic variables, it finds transparency to be in its interest. Transparency is a way of achieving credibility for its estimates. “We have to convince the world that we have a sensible way of doing busi­ness,” a senior CBO official recently said.

However, the CBO is not completely transpar­ent when making its baseline estimates. According to persons familiar with the baseline estimating process, the CBO’s internal baseline forecast con­tains a great deal of detail that is of significant use to both CBO and Joint Committee revenue estima­tors but is never released, even to the House and Senate budget committees. It should be released, however, as a means of further enhancing the credibility of the CBO’s estimates.

There is little downside for the CBO in making its baseline estimating process relatively transpar­ent, because its baseline estimates are unlikely to come under political pressures from lobbyists and special-interest representatives. “No one lobbies on the baseline,” a Washington think-tank economist has observed. In contrast, when the CBO makes its estimates of the costs of non-tax legislation:

Lobbyists watch the process carefully, hoping to find analytic errors if a score goes against them—or to persuade analysts to adopt assumptions favorable to their cause before the analysis begins.[70]

Rudolph G. Penner, a former CBO director and the author of the article just quoted, continues:

More than once I had to hold the phone away from my ear when listening to a member of Congress who claimed that our scoring methods had destroyed some pet initiative that, but for our stupidity, would save the nation.

Fear of politicization has led to the physical and social isolation of the revenue-estimating staffs from other tax policy staffs at the JCT and Trea­sury. As a former Treasury estimator puts it, “A trade-off has been made at both JCT and Treasury to ‘protect the revenue estimator,’ which has had the partially intended effect of making the estima­tion process more secretive, and the staffs isolated and less accountable to their peers (but not less accountable to politicians and political appoin­tees). The current separation of revenue estimating from public tax policy analysis,” he continues, “has prevented a lot of good economic analysis from being included in the public policy debate.” He concludes that “The separation of the revenue esti­mating staff from the policy economists at both JCT and Treasury, and their general isolation from the rest of the economic and public policy com­munity, has been detrimental to the policy debate, the tax staffs, and the individual revenue estima­tors themselves.”

Disclosure advocates should recognize the gen­uineness of agency concerns that greater transpar­ency for the revenue-estimating process will politicize it. At a minimum, these advocates need to consider how to protect the integrity of the pro­cess even though it becomes more open to scru­tiny by those who seek to influence it. In addition, protection for the estimators themselves, both from unwelcome publicity and from undue politi­cal pressure, is also very important.

The example of the Congressional Budget Office is instructive. It has had a succession of strong, capable directors, willing to protect their estimat­ing staffs from pressures brought to bear by out­siders.[84] The same is true at both Treasury and the Joint Committee, so this essential bulwark against politicization is in place. Written rules and prac­tices, modeled on those in place at the CBO,[85] would help to reinforce and solidify the protec­tions provided by strong tax administrators.

Argument #3: Lack of Staff Resources

Enhancing the transparency of the revenue-esti­mating process is a labor-intensive exercise. At bottom, it is no different from any other kind of publishing. Publishing typically involves writing, editing, revising, and classifying information and creating formats and indexing tools to facilitate access to that information by interested users. Enhancing transparency is not a job that can be done by estimating staffs that are already belea­guered and overworked. Transparency requires more staff time, more writing, more review, and a set of skills not commonly taught in economics classes. In addition, staff time will have to be spent evaluating and responding to comments from out­side groups.

Just how overworked are the Treasury and Joint Committee revenue-estimating staffs? And how much labor would be required to bring their work into the public domain? The short answer to both those questions is that no one really knows, not even the agencies themselves.

Accurate statistics are unavailable partly because there is no agreement about what constitutes a “revenue estimate.” For example:

• Is guidance by an estimator in the course of a telephone call to be counted as a “revenue estimate”?
• Is an in-depth estimate requiring hundreds of hours of staff time to be given the same weight as an “easy” estimate that can be dashed off in the course of an afternoon?
• If an estimate regarding a specific tax proposal is rerun six successive times on the basis of six variations in a crucial assumption, does that count as one estimate or six estimates?
• If an estimate is redone multiple times to take into account successive changes in the lan­guage of a legislative proposal, does that con­stitute one estimate or many estimates?
• If a prior revenue estimate is rerun against an updated macroeconomic baseline[86] without other changes, does that count as one estimate or two?

Because answers to these questions are essen­tially arbitrary, it is difficult or impossible to pro­duce meaningful workload statistics relating to the revenue-estimating process.

However, no matter how the term “revenue esti­mate” is defined, it is clear that the number of esti­mates prepared by the Treasury and Joint Committee staffs has increased steadily over the years.[87] It is also clear that both staffs are sub­jected to unmanageable time pressures during the closing days of a congressional session and (in the case of Treasury) during the preparation of the annual federal budget. But periods when time pressures are unmanageable are juxtaposed with periods of calm after a legislative session concludes (or, in Treasury’s case, after the President submits his budget to Congress). So, again, workload anec­dotes do not reveal the whole story.

When asked, Treasury states that full transpar­ency for revenue estimates would require it approximately to double the size of its existing revenue-estimating staff. This would involve increasing that staff from 13 to 26 professionals, plus support staff. That estimate sounds unrealisti­cally high, particularly in light of the Congres­sional Budget Office’s experience in implementing transparency initiatives. Nor is it clear how much of this additional staff would be needed to do work—such as quality control and documentation of estimates—that ought to be done already (but often is not).

However, suppose Treasury is right and that full transparency for its revenue-estimating process would require it to double the size of its estimating staff. That would cost $2 million–$4 million per year. This seems a relatively small price to pay, given the crucial role that revenue estimates play in the tax legislative process.

In summary, advocates of transparency need to recognize that enhancing the transparency of the Treasury and JCT revenue-estimating processes is going to require additional staff resources. The benefits of greater transparency, though intangible, are likely to be well worth those additional costs.