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WebMemo #359 on Taxes

November 3, 2003

Methodology Behind Jobs Creation Act Data

By and

(This methodology supports the research findings found in the WebMemo: Jobs Creation Act: Original Bill Provides Most Growth.)

Methodology

 

I. Methods Used to Simulate the Original Version of HR 2896

 

Researchers at the Center for Data Analysis used the Global Insight, Inc. (G.I.I.), U.S. Macroeconomic Model to perform the economic simulation of the plan, setting the July 2003 G.I.I. U.S. Macroeconomic forecast as a baseline. The analysis encompassed every enumerated provision of the original plan as listed by the Joint Committee on Taxation (J.C.T.) in its scoring document for that plan.[1] Most provisions were simulated by adjusting the model's effective federal tax rate on corporate income by an amount targeting the J.C.T. static estimate for the tax collection change resulting from each provision. However several provisions were simulated differently because CDA analysts felt that the provision could not be faithfully modeled merely by reducing effective corporate tax rates. These provisions are listed below.

 

Reduction in corporate income tax rates for smaller corporate taxpayers: CDA researchers simulated this provision by reducing the model's federal marginal tax rate on corporate income by an amount consistent with the J.C.T. static estimate for tax collection changes resulting from this provision.

 

Extension and modification of the research credit: CDA researchers adjusted the model variable controlling the federal corporate tax credit for research to hit the J.C.T. static estimate for tax collections changes resulting from this provision.

 

Incentives to reinvest foreign earnings: This provision is also known as the Homeland Investment Act of 2003. This provision would change the tax code to include a temporary incentive for American corporations currently holding overseas substantial earnings from foreign operations, to bring these earnings to the United States, with the result of spurring economic activity at home. Researchers at JP Morgan estimate that this provision would result in the repatriation of about $300 billion in earnings from abroad. This infusion of capital would be expected to fund a 2‑3% increase in non-residential investment spending during the two years subsequent to enactment of the provision.[2] CDA analysts simulated this provision by adjusting federal corporate tax collections and non-residential investment within the model.

 

Two-year extension of increased expensing for small business: This provision would extend small business expensing of non-residential investment for two years. CDA analysts simulated this provision by adjusting the effective federal personal income tax rate in the model to the J.C.T. static estimate for the change in tax collections resulting from this provision.

 

One-year extension of bonus depreciation: CDA economists adjusted bonus depreciation-related model variables to reflect an extension of bonus depreciation.

 

Expansion of manufacturing equipment depreciation: CDA analysts simulated this proposal by adjusting the model's federal effective tax rate on corporate income as well as the model's cost of capital for manufacturing to reflect accelerated depreciation.

 

II. Methods Used to Simulate the Compromise Version of HR 2896

 

The CDA analysis of the compromise version encompassed every enumerated provision of J.C.T.'s static estimate of the effects of the proposal on tax collections.[3] CDA economists used the G.I.I. U.S. macroeconomic model as its research tool, setting the G.I.I. July 2003 forecast as a baseline. As with the original plan, CDA economists estimated this plan's fiscal and economic effects in the case of most provisions, by adjusting the model's federal corporate effective tax rate on corporate income. However CDA analysts simulated some provisions without exclusive reliance on the effective corporate tax rate.

 

Manufacturing rate cut and reduction in corporate income tax rates for smaller corporate taxpayers: CDA researchers simulated this provision by adjusting the federal marginal tax rate on corporate income in order to target the J.C.T. static estimate for the effect of this provision on federal revenue.

 

Two-year extension of increased expensing for small business: CDA analysts estimated this provision, as they did in simulating the original package-through an adjustment in federal personal income tax rates.

 

Repeal of extra-territorial income provisions: This provision would repeal tax rules intended to promote exports by American corporations. Their repeal would exert an effect on federal revenue as well as on the distribution of gross domestic product among its components. CDA analysts believe that the effect of the repeal of this provision would be to shift gross domestic product (GDP) away from net exports and toward consumption, non-residential investment and residential investment. Congressional staff estimated the amount of the shift in GDP away from net exports and toward other components of GDP.[4] Applying these estimates, CDA analysts phased in reductions in the amount of 1.3 percent for imports and 1.7 percent for exports.

 

(This methodology supports the research findings found in the WebMemo: Jobs Creation Act: Original Bill Provides Most Growth.)






[1] Joint Committee on Taxation, U.S. Congress, "Estimated Revenue Effects of H.R. 2896, The `American Jobs Creation Act of 2003,'" August 1, 2003, at www.house.gov/jct/x-71-03.pdf.

[2] See JP Morgan Securities, Inc., "Introducing the Homeland Investment Act," May 1, 2003; Bank of America published estimates of $400 billion of repatriation in the first year after enactment; see Bank of America, Inc., "Alert: Homeland Investment Act; an Update," Risk Management Advisory, July 11, 2003; PriceWaterhouseCoopers estimated that the amount of repatriated income would range between $143 billion and $274 billion in the first year after enactment; PriceWaterHouseCoopers, "Memorandum," April 30, 2003.

[3]Unpublished estimates were used in this simulation, however these unpublished estimates are very similar to those later published by the Joint Committee; see Joint Committee on Taxation, U.S. Congress, "Estimated Revenue Effects Of The Chairman's Amendment In The Nature Of A Substitute To H.R. 2896, The 'American Jobs Creation Act Of 2003,' Scheduled For Markup By The Committee On Ways And Means On October 28, 2003," October 24, 2003, http://www.house.gov/jct/x-95-03.pdf.

[4] Congressional Research Service, "Tax Benefits for Exporters: Foreign Sales Corporations (FSC's) and the Extraterritorial Income (ETI) Benefit," September 8, 2003.

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