August 30, 2005

August 30, 2005 | Commentary on Legal Issues

Legislative Lowdown -- Week of August 29th

Ordinary Americans can be excused if they seem befuddled at how often Washington institutions lose touch with reality.
One recurring example of a detached institution is the Joint Committee on Taxation (JCT), a collection of economists hired to provide Congress with reasonably accurate assessments of how changes in tax policy will affect tax collections. Though it may be hard to imagine, the nameless, faceless economists who work at the Joint Committee are among the most powerful people in Washington.

How can that be?

The tyranny of the Joint Committee flows from our budget laws, which require Congress to abide by the JCT's estimates of how proposed changes in federal tax law will affect the flow of revenue to Washington. These estimates define the contours of policy debates and often determine the success or failure of important initiatives.

For example, if a JCT economist concludes that a tax idea championed by the chairman of the Senate Finance Committee, by the speaker of the House or even by the President would "cost" the federal treasury a boatload of revenue, that determination trumps all else and will stand no matter how powerful the proponent.

This tyranny rears its ugly head most detractively when one of those estimates bears no relation to economic reality. For example, most Americans and many independent economists believe that reductions in the tax rate on individual or corporate income cause us to spend, save and invest more than we would have absent those changes. These behavioral changes, in turn, lead to more jobs, higher wages and more tax revenue than would have otherwise been the case. Known as the "supply side" effect, these "dynamic" consequences of policy changes have been widely and repeatedly documented since the 1980s. Rational observers would assume behavioral changes such as these would be reflected in the work of the JCT. Sadly, they would be wrong.

Bad Estimates

The most recent example of JCT estimating gone awry comes from an analysis published by the International Strategy and Investment Group (ISI) that looks at the actual revenue effect of one provision of the American Jobs Creation Act of 2004.

Previously, U.S. firms operating in foreign countries paid taxes not only to the host country but, when the firm opted to bring those profits back to the United States, additional taxes to Uncle Sam so that the total reached the top U.S. corporate rate of 35%. Lawmakers, believing this policy encouraged firms to reinvest foreign profits overseas rather than in the United States, created a one-year window during which time firms bringing their profits home would pay a mere 5.25% rate.

And bring them home they did. According to the ISI study, the amount of "repatriated" profits thus far in 2005 already exceeds the official JCT forecast by 41%. Based upon the recent explosion in the number of companies announcing repatriations, the amount of repatriated profits for all of 2005 likely will be more than double the JCT prediction. Economists at JP Morgan predict this new wave of investment will result in 500,000 new jobs and add 1% to the Gross Domestic Product over the next two years.

And what about the revenue effects of all this economic dynamism missed by JCT's economists? The American Shareholders Association estimates the revenue surge in corporate tax revenue will come in at a cool $20 billion above expectations. Errors of this magnitude by private sector economists would lead to one very predictable dynamic effect-job loss!

Will They Ever Learn?

The next test for the revenue estimators at the JCT will come in September when the Senate considers Sen. Jon Kyl's (R.-Ariz.) proposal to put the final nail in the coffin of the death tax. The brainy veteran lawmaker believes this hated tax undermines economic growth and has fought diligently for years for its full and permanent repeal. Kyl argues full repeal would lead to the creation of hundreds of thousands of new jobs, a conclusion supported by Heritage Foundation economists. (See August 15 "Legislative Lowdown.")

Not surprisingly, Kyl has been stymied once again by those stubborn economists at the JCT who project the revenue loss from full repeal to be so great-approximately $30 billion over just four years-that he has been forced into negotiations with liberal senators who derive psychic pleasure from taxing the "rich."

That's the secret of the JCT's power. No one knows their names, but we all feel the consequences of their flawed analyses. Although now, with that secret out, maybe that's about to change.

Mike Franc, who has held a number of positions on Capitol Hill, is vice president of Government Relations at The Heritage Foundation.

About the Author

Michael Franc Distinguished Fellow
Government Studies

First appeared in Human Events