publication of "A Dynamic Analysis of Permanent Extension of the
President's Tax Relief" marks an important and informative
departure for the Office of Tax Analysis (OTA) in the U.S.
Department of the Treasury. It is the OTA's first public attempt to
do a dynamic analysis of a major legislative initiative-the
President's proposal to make permanent certain elements of his 2001
and 2003 tax cuts.
The OTA staff
find that not all tax relief is created equal. Tax relief measures
that permanently reduce marginal tax rates on labor and capital
income raise gross national product (GNP) in the long run. In
contrast, tax relief measures that also extend expiring
deductions and tax credits (like the 10 percent tax bracket and the
$1,000 child credit) bolster after-tax income. However, they have
minimal-in some cases negative-effects on GNP.
economic effects of tax relief are negative in the long run depends
in part on how the government finances tax relief. According to the
OTA's estimates, GNP declines in the long run if the government
raises income taxes tomorrow to pay for temporary tax relief today.
GNP increases in the long run if tax relief is made permanent and
financed with future cuts in government consumption. However,
gains in GNP are greatest if tax relief is limited to permanent
marginal rate cuts and financed with lower spending.
for Data Analysis Report summarizes the OTA's work and
recommends three improvements in its modeling and exposition.
Future OTA reports should:
additional time periods for estimates of the economic effects of
changes in tax policy. In this report, the OTA gives only two sets
of point estimates for the impact of a change in policy on GNP-a
five-year average percent change falling within the 10-year budget
period and a long-run percent change.
information about the revenue effects- particularly the dynamic
feedback effects-of changes in tax policy. In this report, the OTA
discusses only the economic effects of extending the
President's tax relief.
Vary the timing
and combination of financing rules to determine how sensitive the
results are to the government's long-run fiscal policy. In this
report, the OTA assumes that the government finances tax relief
today with either an immediate increase in taxes or an immediate
decrease in government consumption tomorrow.
Dynamic Analysis at
fiscal year 2007 budget submission to Congress includes a number of
important initiatives. Among them are proposals to reduce
mandatory and discretionary federal spending and to extend
permanently tax relief provisions originally enacted in the
Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001
and the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of
budget also includes a plan to create a Dynamic Analysis Division
within the OTA. Dynamic analysis involves accounting for
changes in such major macroeconomic factors as labor force
participation, investment, and capital accumulation when
analyzing how policy changes influence budget outcomes.
of the economic and budgetary effects of tax policy changes can
differ substantially from conventional revenue estimates.
Conventional revenue estimates may include some microeconomic
behavioral effects of changes in tax policy. Thus, they may take
into account shifts between business sectors and entity forms and
in the timing of transactions and income recognition.
However, they exclude the economy-wide macroeconomic effects of
changes in tax policy on federal receipts.
Over the past 10
years, serious work has been underway to develop the tools needed
to produce dynamic estimates. Since 1997, the Joint Committee
on Taxation (JCT) has been working to build a capability to do
dynamic analysis. The JCT has recently published several papers
describing the application of its macroeconomic models to the
analysis of the economic and revenue effects of tax policy
changes. In 2003, the Congressional Budget
Office (CBO) published for the first time a dynamic analysis of the
President's budget. It has since published several technical
papers describing the various models and methodologies that it uses
in its dynamic analysis of tax policy. In contrast, until very
recently, the Treasury Department published only conventional
estimates of the revenue effects of tax proposals.
Current work at
the Treasury Department has confirmed the value of the President's
plan to create a Dynamic Analysis Division within the OTA. The
fiscal year 2007 Mid-Session Review included for the first
time a dynamic analysis of a change in tax policy-the
permanent extension of provisions of EGTRRA and JGTRRA that are set
to expire in 2010.
On July 25, 2006,
the OTA released a separate report providing a more detailed
description of its analysis. In that report, the OTA decomposes the
President's proposals for extending tax relief into three
components and analyzes the economic effects of each.
Lower Tax Rates on Capital Gains and Dividend Income. JGTRRA
lowered preferential tax rates on capital gains and put in
place preferential tax rates on dividend income.
The Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005
extended JGTRRA's capital gains and dividend provisions
through 2010. However, with no further extension,
qualified dividend income will be taxed at ordinary income tax
rates starting in 2011. Individual long-term net capital gains
realizations will be taxed at a pre-JGTRRA maximum rate of 10
percent or 20 percent starting in the same year.
The OTA estimates
that permanently extending JGTRRA's preferential rate structure
would reduce average marginal tax rates on capital gains by 21
percent or more relative to current law. It estimates that average
marginal tax rates on dividends would decline by around 53
Lower Marginal Tax Rates on Ordinary Income. Under current law,
EGTRRA's lower marginal tax rates on ordinary income are also set
to expire at the end of 2010. With no extensions, marginal tax
rates in the top two tax brackets will rise in 2011 from 35 percent
to 39.6 percent and from 33 percent to 36 percent. Marginal
rates in the next two income tax brackets will increase from 25
percent and 28 percent to 28 percent and 31 percent.
The OTA estimates
that extending EGTRRA's lower marginal rates would reduce average
marginal tax rates on wages by over 5 percent after 2010. It
would reduce average marginal tax rates on interest income by 7
percent-8 percent and business income by 11 percent.
EGTRRA Provisions That Increase After-Tax Income. EGTRRA also
includes several provisions that directly boost after-tax income.
The provisions are scheduled to expire after 2010, but extending
them would generate little change in marginal tax rates on ordinary
income. These provisions include the 10 percent tax bracket,
the $1,000 child tax credit, and marriage penalty relief. Marriage
penalty relief encompasses an increase in both the standard
deduction and the size of the 15 percent tax bracket for joint
In its report,
the OTA compares three separate scenarios. First, the OTA considers
only a permanent extension of JGTRRA's preferential rates on
capital gains and dividend income. It then layers onto that an
extension of EGTRRA's lower marginal rates on ordinary income.
Finally, the OTA combines EGTRRA's and JGTRRA's lower rates on
capital gains, dividend income, and ordinary income with provisions
of EGTRRA that primarily affect after-tax income. The OTA's
analysis does not take into account permanent repeal of the estate
tax but instead assumes that the estate tax phases out in 2010 and
reverts to its pre-EGTRRA level in 2011. In addition, it excludes
permanent alternative minimum tax (AMT) relief.
What the OTA
Overall, the OTA
reaches two broad conclusions:
relief measures that jointly reduce marginal tax rates on
capital gains, dividend income, and ordinary income produce bigger
long-run gains in GNP than measures that only modify the amount of
after-tax income. This is largely because cuts in marginal rates
directly increase the after-tax wage rate (i.e., the after-tax rate
of return to labor) and the after-tax rate of return to capital.
Higher after-tax returns to both labor and capital tend to
encourage individuals to substitute leisure for labor (a
substitution effect). They also tend to encourage greater private
saving and investment, and thus a buildup of the domestic capital
stock. New or bigger deductions and tax credits do not have
the same incentive effects. They boost after-tax incomes, not
after-tax returns. As a result, individuals can increase or
even maintain the same level of after-tax income by working the
same or fewer hours (an income effect).
how the government finances tax cuts matters. Tax cuts can
partially-but, as a general rule, not entirely-pay for themselves.
The government can respond to any subsequent increase in the
debt-to-GNP ratio by cutting spending or raising taxes. In
general, the OTA finds that GNP is higher in the long run if tax
cuts are made permanent and accompanied by future reductions
in federal spending. On the other hand, long-run GNP is lower,
or even declines, if the federal government raises average and
marginal tax rates on all labor and capital income to pay for what
turns out to be only a temporary extension of EGTRRA's and JGTRRA's
Recommendations on the OTA's Analysis
How useful is the
information provided in the OTA's analysis of the economic effects
of permanently extending EGTRRA's and JGTRRA's expiring
provisions? We evaluated the OTA's analysis by considering how
well it answers three key policy questions:
What are the
economic effects? Do different types of tax proposals produce
different economic outcomes?
What are the
budget effects? Do different types of tax proposals produce
different budgetary outcomes?
What are the
effects of the model's financing rules? Do the economic results
change depending on what type of long-run fiscal policy is
Do different types
of tax proposals produce different economic outcomes?
The OTA compares
the impact of different types of tax cuts on GNP, private
consumption and investment, the domestic capital stock, and labor
supply. In general, the OTA's results show that reducing marginal
tax rates on capital gains, dividend income, and ordinary
income produces larger economic gains than permanently extending
both lower marginal rates and the 10 percent tax bracket, the
$1,000 child tax credit, and marriage penalty relief. For example,
assuming that tax cuts are financed with future cuts in government
consumption, GNP is 1.1 percent higher in the long run if
EGTRRA's and JGTRRA's lower marginal rates are extended. However,
GNP is 0.7 percent higher if both EGTRRA's and JGTRRA's lower
marginal rates and EGTRRA's expiring deductions and tax credits are
The OTA could
improve the presentation of its economic results in one regard. The
OTA provides estimates of the impact of a tax policy change on GNP,
private consumption and investment, the domestic capital stock, and
labor supply for only two periods. It shows the average percent
change (relative to baseline) between 2011 and 2016 and a
"long-run" percent change. Long-run here refers to a steady-state
value, or the percent change (relative to baseline) in a given
economic indicator after the model has converged to its final
Recommendation. In a more technical document like the OTA's
July 25 report, some additional detail would be helpful. For
example, the OTA could show average percent changes for a handful
of five-year periods after 2017. Doing so would give the reader
some sense of how quickly the model that the OTA uses-the Tax
Policy Advisers (TPA) model-converges. It would thus define the
"long run" in the context of the specific tax policy change being
Do different types
of tax proposals produce different budgetary outcomes?
Not all tax
proposals are created equal. The OTA shows that different types of
tax proposals produce different economic outcomes. If different
types of proposals produce different economic outcomes, they are
also likely to produce different budgetary outcomes. Regrettably,
the OTA's analysis is silent on one important budgetary outcome-the
dynamic revenue (feedback) effects-of extending EGTRRA's and
JGTRRA's expiring provisions.
models such as the one used by the OTA can estimate dynamic
feedback effects, but these are different from dynamic revenue
estimates. Specifically, they are not estimates of tax revenues
that will be collected over the 10-year budget period. Rather, they
are estimates of the additional tax revenues that will
be collected relative to a long-run baseline forecast as a result
of the macroeconomic effects of a change in tax policy on federal
receipts. Policy analysts can use such information to evaluate
different proposed changes in tax law. They can also use such
information to gauge the extent to which tax cuts are likely to pay
In a July 27 talk
to the National Economists Club, Robert Carroll, Deputy Assistant
Secretary of the Treasury for Tax Analysis, indicated that the OTA
envisioned "that dynamic analysis at the Treasury Department may
ultimately evolve" in the direction of providing estimates of
dynamic feedback effects. However, he gave no indication as to
when-or even if-such information would be provided.
The TPA model
implicitly accounts for dynamic feedback when it adjusts income tax
rates or government consumption to target a ratio of debt to
GNP. An increase in GNP implies gains in
individual and corporate incomes and in federal tax revenues.
The greater the increase in GNP, the greater in general is the gain
in federal tax revenues. Thus, permanently extending just EGTRRA's
and JGTRRA's expiring marginal rate provisions should generate
larger dynamic feedback effects than would extending both lower
marginal rates and EGTRRA's expiring deductions and tax credits. In
turn, tax cuts that are accompanied by larger dynamic feedback
effects should require smaller hikes in average and marginal income
tax rates or smaller cuts in government consumption to hold the
growth rate of the federal debt stock to the growth rate of
Recommendation. The CBO and the JCT already regularly
estimate the dynamic feedback effects of different tax proposals.
The OTA should be encouraged to use estimates of economic and
budgetary outcomes from the TPA model (and its other
macroeconomic models) to tease out similar measures of dynamic
Do the economic
results change depending on what type of long-run fiscal policy is
As a general
rule, tax cuts-particularly those that reduce marginal rates-will
produce some dynamic revenue (feedback) effects, but they will not
pay for themselves. In the TPA model, this means that either
federal consumption must fall or federal revenues must rise
beginning in 2017 to ensure a constant debt-to-GNP ratio. The OTA
compares the effects of different financing rules on GNP, private
consumption and investment, the domestic capital stock, and
labor supply. Economic outcomes in both the short run and the long
run are influenced by the financing rule that the OTA adopts.
economic outcomes can be very sensitive to the type of model used
and the modeling assumptions made. Thus, some care is required
when evaluating economic effects under alternative financing
options, particularly in the second five years before the onset of
debt-to-GNP targeting. For example, between 2011 and 2016, private
investment is an average of 1.8 percent higher if tax cuts today
are financed with increases in income tax rates tomorrow. It is an
average of 3 percent lower if tax cuts today are financed with cuts
in government spending tomorrow.
imply that financing temporary tax cuts today with higher taxes on
labor and capital income tomorrow produces superior economic
outcomes in the short run. However, such a conclusion is
partly an artifact of the financing and modeling assumptions
adopted in the OTA analysis. For example, the TPA model
assumes that households have perfect foresight about future
federal tax and spending policies. In addition, the OTA
assumes that the federal government imposes debt-to-GNP targeting
in a single period.
tend to maximize the near-term economic consequences of the
financing rules. They do so by giving individuals and firms a
strong incentive to shift labor supply and investment activity
forward to take advantage of temporarily lower average and
marginal tax rates on labor and capital income. In reality, we
would probably not see such a pronounced response to a temporary
extension of EGTRRA's and JGTRRA's expiring provisions. This is
partially because future fiscal policies are highly uncertain and
partially because any changes in taxes or spending needed to
make fiscal policy sustainable in the long run are likely to be
phased in over an extended period.
Recommendation. The OTA could conduct some further
sensitivity analysis to clarify the extent to which financing rules
affect the near-term economic consequences of extending
EGTRRA's and JGTRRA's expiring provisions. For example, in its
dynamic analysis of the President's budget, the CBO typically
phases in the government's long-run (intertemporal) budget
constraint over 10 years. The CBO also assumes that a blend of
government consumption and transfer payments to individuals is cut
to impose the government's intertemporal budget constraint. The OTA
could show the short-run and long-run economic effects of extending
EGTRRA's and JGTRRA's expiring provisions under such alternative
assumptions and compare the results to what it already reports.
The Model Used by
The OTA's report
provides a detailed description of the OTA's dynamic analysis of
the economic effects of extending EGTRRA's and JGTRRA's
expiring provisions. This analysis is comparable in many ways
to work already underway at the CBO and the JCT. For example, the
OTA uses a four-sector version of the Tax Policy Advisers'
overlapping generations (OLG) model. The JCT frequently uses a
slightly smaller version of the same OLG model in its dynamic
analysis of the economic and revenue effects of tax proposals.
The TPA model is
a large-scale dynamic computable general equilibrium (CGE)
model with overlapping generations of taxpayers. Taxpayers
maximize utility over a 55-year adult life that includes 45
working years and 10 retirement years. Individual lifetime
utility is a discounted aggregation of utility in each of those 55
adult years. In each period, individuals choose leisure and
consumption to maximize their utility. They also save and
accumulate assets. At the end of 55 years, individuals leave
bequests to younger generations.
The TPA model
accounts for production and investment decisions made by firms and
households. It includes four production sectors: corporate
non-housing goods and services, non-corporate non-housing goods and
services, owner-occupied housing, and rental housing. Corporate and
noncorporate firms choose labor inputs and make
investment decisions to maximize their value or profits. They
consider likely changes in tax policy when planning the optimal
time path for investment. Similarly, homeowners and landlords make
investments to maximize the value of their housing stock. They
explicitly consider how changes in the tax treatment of housing
will likely affect home prices.
models are approximations of reality. Some models focus on long-run
economic outcomes; others focus on short-run economic outcomes.
Some models include individuals for whom consumption in any given
period is a fixed proportion of current after-tax income. Others
include individuals for whom consumption is a function of real
accumulated wealth. The basic features of an economic model
determine its focus and influence the types of questions that it is
best suited to answer.
The TPA model is
an intertemporal CGE model. Thus, in the model, individuals and
firms are forward-looking. They anticipate changes in the
policy environment when making decisions about current and
future investment, consumption, and labor supply. In addition,
individuals and government are subject to intertemporal budget
constraints. Neither an individual household nor the federal
government can live beyond its means indefinitely. In the long run,
the present value of consumption or spending must be tied to the
present value of income or revenues.
Finally, in the
model's baseline economy, all resources (e.g., labor) are fully
employed, and GNP is at its potential in every period. Models that
assume full employment are not appropriate tools for analyzing the
short-run effects of changes in tax policy or tax policies designed
to stimulate private investment or consumption at a time when
aggregate demand is below aggregate supply. However, they are
good vehicles for analyzing the long-run incentive effects of lower
marginal tax rates on output, labor supply, private saving and
investment, and the allocation of capital.
these three basic features of an intertemporal CGE model requires
certain simplifying assumptions. These assumptions are
necessary if the model is to be solved. They are standard to
intertemporal CGE models as a class and should not be considered
peculiarities of the TPA model.
For example, the
TPA model is calibrated to a steady-state balanced growth path. All
sector outputs, capital and debt stocks, final demands (e.g.,
consumption and investment), and incomes in the model's baseline
expand at a constant rate, typically set equal to the growth rate
of labor productivity. Baseline fiscal policy is also assumed to be
stable or sustainable in the long run. The federal government
can run deficits and accumulate debt, but not without bounds.
Rather, federal revenues, spending, and ultimately debt grow
at the same rate as GNP, making all three fiscal policy variables
constant shares of output in every period.
In addition, the
TPA model assumes perfect foresight. This means that in the
TPA model, firms and individuals are assumed to know with certainty
the future values of all factor prices and policy variables
and to adjust their current and future behavior accordingly.
The perfect-foresight assumption plays an important role in
determining the timing and magnitude of households' and firms'
responses to changes in fiscal policy.
In the TPA model,
the federal government is subject to an intertemporal budget
constraint. Specifically, the government can initially-but not
indefinitely-finance tax cuts with new borrowing and deficits.
Thus, in any given year, the sum of the government's expenditures
on goods and services, transfer payments to individuals, net
interest on the existing debt, and other spending can exceed total
revenues from income and other taxes. However, in the long run, the
government's overall deficit cannot grow faster than GNP.
Rather, the government's intertemporal budget constraint requires
that the government run a compensating budget surplus in the future
by raising taxes or cutting spending.
The OTA imposes
the government's intertemporal budget constraint using
"financing" rules similar to those frequently applied in models
used by the CBO. Between 2007 and 2016, the federal
government finances the extension of EGTRRA's and JGTRRA's expiring
provisions with deficits and new debt. However, beginning in 2017,
it either cuts government consumption or proportionately increases
tax rates on corporate, individual, and capital income to
limit the growth rate of debt to the growth rate of GNP.
Tax relief is permanent if it cuts government consumption. Tax
relief is only temporary if it proportionately increases
income tax rates. In either case, income tax rates immediately rise
or government consumption immediately falls in 2017 so that the
federal government's primary surplus increases by enough to cover
the increase in net federal interest payments.
government imposes its intertemporal budget constraint influences
individuals' labor-supply decisions and firms' and households'
investment decisions. If the government finances tax cuts
today with higher taxes tomorrow, economic activity in the
long run generally declines. However, anticipation of higher
average and marginal tax rates on labor and capital income after
2016 boosts hours worked, private saving and investment, and the
capital stock over the first 10 years.
the government finances tax cuts today with lower government
consumption tomorrow, economic activity increases in the
future. However, the gains in labor supply, private saving and
investment, and capital stock are not as great within the first 10
years because individuals and firms anticipate the continuation of
lower marginal income tax rates in the future. As a result, the
initial increase in private saving is not enough to offset
increased borrowing by the government, and new government borrowing
crowds out some private investment. That crowding out is
particularly pronounced if all expiring components of EGTRRA
and JGTRRA-including the 10 percent bracket and the child tax
credit, which affect only after-tax incomes-are extended.
There is one
exception. If the government finances marginal rate cuts today with
higher income taxes in the future, economic activity is uniformly
higher in the long run-just not by as much as would be the case if
the government financed tax cuts today with lower government
consumption tomorrow. This is because this particular
combination of tax cuts followed by tax hikes reduces the burden of
taxation on corporate investment relative to labor income and
capital income in other sectors. The result is a more efficient
allocation of capital and a modest increase in GNP.
On July 25, the
OTA published a detailed summary of its dynamic analysis of
the President's proposal to make permanent certain expiring
provisions of EGTRRA and JGTRRA. That report, "A Dynamic Analysis
of Permanent Extension of the President's Tax Relief," represents
the OTA's first public attempt to do a dynamic analysis of a major
The OTA is to be
congratulated for its effort. However, future OTA reports on the
subject of dynamic analysis could be improved by including
additional information on not only the economic and budgetary
effects of changes in tax policy, but also the sensitivity of the
OTA's results to assumptions about the government's long-run
Tracy L. Foertsch,
Ph.D., is a Senior Policy Analyst and Ralph A. Rector, Ph.D., is
a Senior Research Fellow and Project Manager in the Center for Data
Analysis at The Heritage Foundation.
 See U.S. Department of
the Treasury, Office of Tax Analysis, "A Dynamic Analysis of
Permanent Extension of the President's Tax Relief," July 25, 2006,
ysisreporjjuly252006.pdf (July 31, 2006). References in the
OTA report to a measure of real (inflation-adjusted) GNP are
referred to in this paper as simply GNP.
 "Budget period"
refers to the time horizon used either to project baseline,
current-law revenues or to estimate the revenue effects of a change
in current law. A 10-year period is standard in the federal budget
 William W. Beach,
"The Bush Budget's Hidden Gold: Dynamic Scoring Comes to Treasury,"
Heritage Foundation WebMemo No. 994, February 9, 2006, at http://www.heritage.org/Research/Taxes/wm994.cfm.
 For additional details,
see Joint Committee on Taxation, U.S. Congress, Overview of
Revenue Estimating Procedures and Methodologies Used by the
Staff of the Joint Committee on Taxation, JCX-1-05, February 2,
2005, pp. 18-19, at /static/reportimages/959F620B80F464003BC60A986110D243.pdf (July
 For example, see Joint
Committee on Taxation, U.S. Congress, Macroeconomic Analysis of
Various Proposals to Provide $500 Billion in Tax Relief,
JCX-4-05, March 1, 2005, at /static/reportimages/19B318E6C770C3B53920DB165CAB4A21.pdf (July
31, 2006), and Exploring Issues in the Development of
Macroeconomic Models for Use in Tax Policy Analysis, JCX-19-06,
June 16, 2006, at /static/reportimages/4975761EDB3B0D3CA48BFB9B0679B217.pdf (July 31,
2006). See also Rosanne Altschuler, Nicholas Bull, John Diamond,
Tim Dowd, and Pamela Moomau, "The Role of Dynamic Scoring in the
Federal Budget Process: Closing the Gap Between Theory and
Practice," American Economic Review, Vol. 95, No. 2 (May 2005), pp.
 See Congressional
Budget Office, An Analysis of the President's Budgetary
Proposals for Fiscal Year 2004, March 2003, at http://www.cbo.gov/ftpdocs/41xx/doc4129/03-31-Analysis
PresidentBudget-Final.pdf (July 31, 2006). Previous such
analyses released by CBO did not include a chapter on the potential
macroeconomic effects of the President's budgetary proposals.
 For example, see
Congressional Budget Office, "How CBO Analyzed the Macroeconomic
Effects of the President's Budget," July 2003, at /static/reportimages/A6294150E32A048935B56896E2B2581D.pdf
(May 16, 2006), and Robert Dennis et al., "Macroeconomic
Analysis of a 10-Percent Cut in Income Tax Rates," Congressional
Budget Office Technical Paper 2004- 07, May 2004, at /static/reportimages/5A05EAF1FECCC20A8744020306DA3A92.pdf
(July 31, 2006). See also Shinichi Nishiyama, "Analyzing Tax Policy
Changes Using a Stochastic OLG Model with Heterogeneous
Households," Congressional Budget Office Technical
Paper 2003-12, December 2003, at /static/reportimages/5FEAFBCB4A665BA52D2B827E8FA6AD36.pdf
(July 31, 2006).
 See Office of
Management and Budget, Mid-Session Review, Budget of the United
States Government, Fiscal Year 2007 (Washington,
D.C.: U.S. Government Printing Office, 2006),pp. 3-4, at /static/reportimages/048E9945CD91F55A1B7032B5CF325932.pdf
(July 31, 2006). For a complete list of expiring EGTRRA provisions,
see Joint Committee on Taxation, U.S. Congress, Summary of
Provisions Contained in the Conference Agreement for H.R. 1836, The
Economic Growth and Tax Relief Reconciliation Act of 2001,
JCX-50-01, May 26, 2001, at /static/reportimages/2C60BCCAB31D09771E7E6C031C098B95.pdf (June 9,
 See U.S. Department of
the Treasury, "A Dynamic Analysis of Permanent Extension of the
President's Tax Relief."
 Under JGTRRA, taxpayers
in the lowest two tax brackets pay a 5 percent tax rate on capital
gains and dividend income through 2007 and no taxes on capital
gains and dividend income in 2008. Taxpayers in all other brackets
pay a 15 percent tax rate on capital gains and dividend income
 JGTRRA's preferential
tax rates on individual long-term net capital gains realizations
and qualified dividend income were set to expire at the end of
2008. TIPRA extends JGTRRA's preferential rate structure through
the end of 2010. For additional details, see Joint Committee
on Taxation, U.S. Congress, Estimated Revenue Effects of the
Conference Agreement for the "Tax Increase Prevention and
Reconciliation Act of 2005," JCX-18-06, May 9, 2006, at /static/reportimages/BB228F97E8FD5B35B495FA8DD13B8910.pdf
(July 10, 2006).
 Ordinary income is all
income that does not qualify as capital gains. Ordinary income
includes wages and salaries, interest income, and business income
reported at the individual level.
 The 10 percent rate
will apply to all taxpayers in the lowest (15 percent) tax bracket.
The 20 percent rate will apply to taxpayers in all other tax
 OTA analyzed the
President's fiscal year 2007 tax relief proposals, which include
permanent repeal of the estate tax. However, they limit AMT
relief to a one-year extension of the 2005 AMT exemption amount
(with no inflation indexing) and a one-year extension of the AMT's
unrestricted use of some personal tax credits. TIPRA, which
President Bush signed into law on May 17, 2006, increases the
individual AMT exemption amount for 2006 and extends through 2006
the AMT's treatment of nonrefundable personal credits. For
additional details, see Joint Committee on Taxation, Estimated
Revenue Effects of the Conference Agreement for the "Tax Increase
Prevention and Reconciliation Act of 2005."
 In a July 27 talk
for the National Economists Club, Robert Carroll, Deputy Assistant
Secretary of the Treasury for Tax Analysis, emphasized that OTA
dynamic analysis was focused on the long-run effects of tax policy.
See Robert Carroll, remarks before the National Economists Club,
July 27, 2006, at http://www.ustreas.gov/press/releases/hp29.htm
(July 31, 2006). Both the CBO and the JCT present results of their
dynamic analyses using tables that are very similar to those
adopted by the OTA. In particular, they typically give five-year
average percent changes for the first 10 years of a simulation and
then a long-run percent change. For example, see Dennis et
al., "Macroeconomic Analysis of a 10-Percent Cut in Income Tax
Rates," and Joint Committee on Taxation, Macroeconomic Analysis
of Various Proposals to Provide $500 Billion in Tax
 See the next section
for additional information on the TPA model.
 Carroll, remarks
before the National Economists Club.
 The same could be said
for any intertemporal CGE model that imposes the government's
intertemporal budget constraint by targeting the debt-to-GNP
 See, for example,
Congressional Budget Office, An Analysis of the President's
Budgetary Proposals for Fiscal Year 2007, March 2006, pp.
29-43, at /static/reportimages/2311A8FF04B9D698FFF184311CDF37D9.pdf
(July 31, 2006). See also Joint Committee on Taxation,
Exploring Issues in the Development of Macroeconomic Models for
Use in Tax Policy Analysis.
 See Congressional
Budget Office, An Analysis of the President's Budgetary
Proposals for Fiscal Year 2005, March 2004, pp. 43-45, at http://www.cbo.gov/ftpdocs/51xx/doc5151/03-08-
PresidentsBudget.pdf (July 31, 2006). The final section of
this report includes a description of the government's
intertemporal budget constraint.
 For additional details,
see John Diamond and George Zodrow, "Description of the Tax Policy
Advisers' Model," unpublished working paper, Rice University, March
15, 2005. See also Tax Policy Advisers, LLC, Web site, at http://www.taxpolicyadvisers.com (August 2,
 For example, see
Congressional Budget Office, An Analysis of the President's
Budgetary Proposals for Fiscal Year 2007, pp. 29-43.
 The individual income
tax includes a progressive wage income tax. It assumes a tax base
that is adjusted for various exclusions, exemptions, deductions,
 Capital income here
includes non-corporate business income, interest income, dividends,
and capital gains. Different average rates are applied to each type
of capital income.
 This means that
the model adjusts taxes or consumption to hold the debt-to-GNP
ratio constant at its 2017 value.