March 29, 2002

March 29, 2002 | WebMemo on Taxes

The Argument for Reality-based Scoring

The attached chart produces clear evidence of the need for reality-based scoring. It shows that the estimators were consistently wrong, and often by more than 100 percent.

The estimators wrongly forecasted that people's behavior would not change when there were changes in the capital gains tax laws.

The 1986 tax reforms put in place a significant increase in capital gains taxes starting in 1987. So the chart below shows that many people were selling in 1986 before the higher taxes would become law. The estimators wrongly assumed that the higher tax rates would increase revenue.

In 1997, capital gains tax rates were reduced. Estimators, using the failed "static model" forecasted a drop in revenue. Again, they were wrong. The tax rates went down, actual capital gains tax revenue skyrocketed.

Not only is the current "static model" bad; it's bad year after year after year. It's time to switch to a reality-based scoring model.

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