Politics & Policy

A Taxing Time

The campaign to repeal the estate tax has always faced a tough slog. Liberal opponents have long attacked it as an effort to squander federal revenue on “tax cuts for the rich.” This charge has also found resonance among deficit hawks, contributing to the narrow failure of a recent Senate proposal to abolish the tax.

What many senators may have never realized is that the proposal could have resulted in a net increase in federal revenue, since it included a provision to offset revenue losses by closing an existing tax exemption. The reason lawmakers may not have known this is that they were relying on economic information from the Joint Committee on Taxation (JCT). This bicameral committee is supposed to provide Congress with impartial, accurate estimates of the expected effects of tax reforms. Instead, it has become a font of economic inaccuracies that act as a powerful barrier to tax cuts.

The JCT reported that repealing the death tax would cost the federal government $281 billion in revenue over the first five years. But that number doesn’t include the effects of a provision in the bill to eliminate the exemption that heirs currently receive from paying capital-gains taxes on the assets they inherit. The JCT itself had found, in a previous study, that eliminating this exemption would bring in an extra $293 billion in tax revenue over five years — the same five years, in fact, to which the JCT’s death-tax estimate applies. If that $293 billion had found its way into the report on the death-tax-repeal bill, it would have shown the bill raising net revenue by $12 billion over the next five years. But, inexplicably, the JCT didn’t bother to share this information with Congress.

The death tax is of course fundamentally unjust, and the case for its elimination does not depend on showing that doing so will have a positive effect on revenue. But the fact that the repeal bill would have had such an effect might have made the difference between passage and defeat, given that the bill ultimately went down in the Senate by only three votes. The JCT’s failure to provide this information is disturbing — but, sadly, it is far from surprising. In 1997, legislators decided to lower capital-gains-tax rates from 28 to 20 percent. In the run-up to this decision, JCT economists solemnly predicted a long-term strain on the treasury. They claimed the tax cut would lead to a small initial revenue boost of $9 billion, followed by an overall revenue decline in the years to follow. Instead, the cut brought a massive initial surge of $72 billion followed by a sustained long-term revenue increase. Something similar happened with the 2004 corporate-tax cut, which the JCT warned would bring a drastic loss in revenue. In fact, corporate-tax revenues went skyward by the billions.

JCT economists have often attributed the discrediting of their dire predictions to “unanticipated revenue increases.” But these increases have been “unanticipated” only because the JCT has failed to account for the effect of tax cuts on economic incentives. The JCT’s refusal to use dynamic economic modeling — which does take account of these incentives — lies at the root of its predictive problems. This original sin is compounded by the JCT’s gross lack of transparency and accountability: Outside economists aren’t allowed to study the models it uses, severely limiting third-party scrutiny.

Responsibility for this mess falls mainly on the chairman and vice chairman of the JCT — Sen. Chuck Grassley and Rep. Bill Thomas, respectively. The unaccountable committee under their watch has habitually poisoned the legislative process with its pro-tax piddle. Taxpayers deserve better, and should demand it.

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