.

MACROECONOMIC ANALYSIS OF H.R. 6760, THE

“PROTECTING FAMILY AND SMALL BUSINESS

TAX CUTS ACT OF 2018” AS REPORTED

BY THE COMMITTEE ON WAYS AND MEANS

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

September 26, 2018 

JCX-79-18
i

CONTENTS

Page

INTRODUCTION ...........................................................................................................................1

MACROECONOMIC ANALYSIS OF H.R. 6760 AS REPORTED BY THE COMMITTEE

ON WAYS AND MEANS ..............................................................................................................2

TABLE 1: ESTIMATED BUDGET EFFECTS OF H.R. 6760, THE "PROTECTING THE 

FAMILY AND SMALL BUSINESS TAX CUTS ACT OF 2018 AS REPORTED BY THE 

COMMITTEEE ON WAYS AND MEANS ...................................................................................7

APPENDIX: DATA: MODELS, AND ASSUMPTIONS USED IN THE ANALYSIS ................8
1

INTRODUCTION

Pursuant to section 5107 of the Concurrent Resolution on the Budget for Fiscal Year 

2018 and House Rule XIII(8)(b), this document,1 prepared by the staff of the Joint Committee on 

Taxation (“Joint Committee staff”), provides an analysis of the macroeconomic effects of H.R. 

6760, the “Protecting Family and Small Business Tax Cut Act of 2018,” as reported by the 

Committee on Ways and Means on September 13, 2018.

 

1

 This document may be cited as follows: Joint Committee on Taxation, Macroeconomic Analysis of H.R. 

6760, the “Protecting Family and Small Business Tax Cut Act of 2018” as reported by the Committee on Ways and 

Means (JCX-79-18), September 26, 2018. This document can also be found on the Joint Committee on Taxation 

website at www.jct.gov.
2

MACROECONOMIC ANALYSIS OF H.R. 6760 AS REPORTED

BY THE COMMITTEE ON WAYS AND MEANS 

This report provides an analysis of the macroeconomic effects of a proposal to reform the 

Internal Revenue Code (“Code”). Specifically, the proposal analyzed here is the one summarized 

in JCX-71-18, Estimated Revenue Effects of H.R. 6760, the “Protecting Family and Small 

Business Tax Cuts Act of 2018,” Scheduled for Markup by the Committee on Ways and Means 

on September 13, 2018. The Joint Committee staff estimates that this proposal would increase 

the average level of output (as measured by real Gross Domestic Product (“GDP”) by about 0.1 

percent from 2019 to 2028 relative to average level under the present law baseline. That increase 

in output would increase revenues, relative to the conventional estimate of a loss of $631 billion 

over that period, by about $93 billion. This budget effect would be partially offset by an increase 

in interest payments on the Federal debt of about $7 billion over the budget period. The Joint 

Committee staff estimates that both the increase in GDP and resulting additional revenues within 

the budget window would begin to decline during following years as the increasing Federal debt 

caused by this bill begins to crowd out private investment. The Joint Committee staff projects 

that in the decades after 2028, while employment will continue to be somewhat higher than 

projected under present law, investment and GDP will be lower than under present law, and the 

budgetary feedback from this effect will become negative.

The following discussion analyzes the macroeconomic effects of the bill. The estimate of 

the macroeconomic revenue feedback effects of this legislation and the following supplementary 

analysis were produced using three macroeconomic simulation models to simulate the growth 

effects of the bill: (1) the Joint Committee staff’s Macroeconomic Equilibrium Growth 

(“MEG”)2 model; (2) an overlapping generations model (“OLG”);3 and (3) the Joint Committee 

staff’s dynamic stochastic general equilibrium model (“DSGE”).4 A brief description of the 

models and the parameter values for each used in this analysis appear in the Appendix to this 

 

2

 A detailed description of the MEG model may be found in Joint Committee on Taxation, Macroeconomic 

Analysis of Various Proposals to Provide $500 Billion in Tax Relief (JCX-4-05), March 1, 2005, and Joint 

Committee on Taxation, Overview of the Work of the Staff of the Joint Committee on Taxation to Model the 

Macroeconomic Effects of Proposes Tax Legislation to Comply with House Rule XIII3(h)(2) (JCX-105-03), 

December 22, 2003.

3

 The OLG model currently used by JCT is leased from Tax Policy Advisors, LLC. Information about this 

model may be found in John W. Diamond and George R. Zodrow, Modeling U.S. and Foreign Multinationals in an 

OLG-CGE Model, Baker Institute for Public Policy, Rice University, working paper, 2015; and in G.R. Zodrow and 

J.W. Diamond, “Dynamic Overlapping Generations Computable General Equilibrium Model and the Analysis of 

Tax Policy: the Diamond-Zodrow Model,” in P.B. Dixon and D.W. Jorgenson (eds.) Handbook of Computable 

General Equilibrium Modeling, vol. 1A, pp. 743-813, North-Holland, 2013.

4

 A description of an earlier version of the DSGE model may be found in Joint Committee on Taxation, 

Background Information about the Dynamic Stochastic General Equilibrium Model Used by the Staff of the Joint 

Committee on Taxation in the Macroeconomic Analysis of Tax Policy (JCX-52-06), December 14, 2006. An 

updated document, which describes modeling improvements, is forthcoming.
3

document.5 This analysis is presented relative to the 2018 economic and receipts baseline 

(“present law”) published by the Congressional Budget Office (“CBO”) in April, 2018.6

Proposal

H.R. 6760 (“the bill”) makes permanent many provisions that were enacted on a 

temporary basis in Public Law 115-97, with a general expiration date of taxable years after 

December 31, 2025. These provisions include significant revision to individual income tax rates, 

lowering the top individual income tax rate from 39.6 percent to 37 percent, lowering statutory 

tax rates for most of the remaining tax rate brackets, and eliminating a number of deductions and 

credits from individual taxable income while increasing others. The biggest such changes in the 

tax base included eliminating personal exemptions while increasing the standard deduction, 

increasing the maximum amount of the child tax credit while increasing the income range over 

which individuals may claim it, and generally doubling the exemption amount for the estate, gift, 

and generation skipping transfer taxes. All of these recently enacted provisions are scheduled to 

expire after December 31, 2025, and are made permanent under the bill. The bill would also 

make permanent two business provisions that are scheduled to expire after December 31, 2025: 

individuals receiving income from certain pass-through businesses may deduct 20 percent of that 

income from their individual income tax, while a cap is imposed on the amount of certain 

passive losses that may be deducted.

Overall, the net effect of the changes to the individual income tax is to reduce average tax 

rates on individual income relative to present law by about 1.6 percentage points, while reducing 

effective marginal tax rates on wages by about 2.3 percentage points beginning in 2026. The bill 

also results in changes in effective marginal tax rates on income from capital of less than one 

percentage point.

Effects on output

The Joint Committee staff estimates that the proposal would increase the level of GDP 

relative to the baseline forecast, by about 0.5 percent during the last three years of the budget 

window when most of the policy takes effect, averaging out to 0.1 percent throughout the 10-

year budget window. In general, tax policy affects economic growth by changing incentives for 

owners of capital to invest, and for potential workers to supply labor to the economy, by 

changing the after-tax rates of return to these two factors of production. Changes in tax policy 

can alter these after-tax rates of return - either directly by changing the amount of payments 

going to taxes, or indirectly, by changing aggregate demand, which can change gross payments 

for output. The projected increase in GDP in this bill results primarily from an increase in labor 

supply, in response to the reduction in effective marginal tax rates on wages. 

 

5

 An updated summary of all three models may be found in Joint Committee on Taxation, Overview of 

Joint Committee Macroeconomic Modeling (JCX-33-18), April 23, 2018.

6

 Congressional Budget Office, The Budget and Economic Outlook: 2018-2028, April 2018.
4

Effects on employment and supply of labor 

The significant reduction in marginal tax rates on labor (resulting primarily from the 

additional tax rate bracket, lower statutory rates for most brackets, and the increase in the child 

credit) provide strong incentives for an increase in labor supply. Because this reduction in 

marginal tax rates on wages reverses a present-law increase beginning in 2026, the timing and 

strength of the labor supply response varies depending on how much foresight individuals are 

assumed to have about the future path of marginal tax rates. The more foresight individuals are 

assumed to have, the more they are forecast to shift their labor effort away from years in which 

the rates increase under present law; under the proposal, such a shift is no longer forecast, 

slightly reducing labor supply before 2026 and increasing it when the proposal takes effect. On 

average, employment is projected to increase by about 0.7 percent relative to baseline levels 

during the last three years of the budget period, averaging to about 0.2 percent over the entire 

budget window. 

Effects on capital stock

Because the bill results in small changes in the taxation of business capital, it provides 

little direct incentive for changes in investment in business capital. The slight reduction in the 

cost of capital is projected to result in an increase of about 0.1 percent relative to capital stock 

under present law during the last three years of the budget period, averaging to a negligible effect 

over the entire budget window. In later years, as increasing Federal government debt begins to 

crowd out private investment, the stock of capital is projected to fall relative to present law.

Effects on consumption

The additional income generated by additional employment - combined with the 

decreased tax liability owing to the proposal - provides individuals with more disposable income, 

thus increasing consumption. The Joint Committee staff estimates that consumption would be 

increased relative to baseline levels of consumption by about 0.5 percent during the last three 

years of the budget window, averaging to about 0.2 percent throughout that 10-year period. 

Effects of the estate and generation skipping transfer tax

Evidence from economic empirical and theoretical research on the effects of the estate 

and generation skipping transfer tax (referred to here as “estate tax”) on economic growth is very 

mixed. On the one hand, to the extent that an individual’s labor effort and investment behavior is 

driven by a desire to maximize the amount of wealth to be left to heirs, an increase in the 

exemption level of the estate tax would increase the marginal value to him of providing these 

additional resources to the economy; if this were the only behavioral response to the estate tax, 

the higher exemption would be expected to increase growth. However, it is also possible that 

individuals subject to the estate tax desire to leave a specific dollar amount to their heirs; in this 

case, the increased exemption from the tax would allow them to reach that target amount more 

quickly, thus reducing their incentive to work and invest. In addition, to the extent that the higher 

exemption increases the amount of income received by heirs, this could reduce the labor supply 

and savings of the heirs, thus reducing the amount of growth in the economy. Because of the 

uncertainty associated with the effects of the estate tax on growth from labor and investment 
5

incentives, changes in the estate tax are incorporated in Joint Committee staff macro models as 

changes in the average tax rate on individual income, and as having no effect on marginal tax 

rates, which are the main drivers of behavioral response in Joint Committee staff macroeconomic 

models. Thus, the effects of the increased exemption from the estate tax are primarily a small 

increase in consumption, and a negligible change in GDP and other macroeconomic aggregates.7 

Growing government debt, foresight, and crowding out

Because it permanently extends individual income tax provisions projected to result in a 

conventionally-estimated reduction in receipts by over $600 billion in the three years at the end 

of the budget window, this bill is projected to result in a growing increase in Federal government 

debt over time. As government debt grows, the government competes for available savings with 

potential private investment, increasing interest rates - a phenomenon often referred to as 

crowding out. The extent to which government debt can crowd out private investment is also 

influenced by how much investment capital is projected to be provided by foreign investors, and 

by how much individuals in the United States change their savings in anticipation of future 

government debt. This bill is projected to result in increasing crowding out of private investment. 

Computable general equilibrium macroeconomic models, including those used by the 

Joint Committee staff in their macroeconomic analysis of this bill, cannot produce any projection 

of economic outcomes over an indefinite time horizon when the path of government debt is 

projected to grow faster than that of GDP permanently. In that circumstance, there is no 

economic decision jointly available to workers, consumers, and producers that allows them to 

pursue their objectives (utility and profit maximization) within the models because financing the 

growing government debt requires that increasing shares of capital available for investment 

become unavailable for private sector production. Economic theory and research provides 

varying views as to how much foresight individuals can be expected to have with respect to 

fiscal policy, and how strong a weight they are likely to place on future as opposed to current 

economic conditions in making their investment and labor decisions. As described in the 

Appendix, each of the three macroeconomic models used by the Joint Committee staff 

incorporates these mechanisms in a different manner.

 

7

 For a brief discussion on ramifications of estate taxation, see Joint Committee on Taxation, The Taxation 

of Individuals and Families (JCX-41-17), September 12, 2017, pp. 47-48, and for additional data and a more 

detailed discussion of economic issues, see Joint Committee on Taxation, History, Present Law, and Analysis of the 

Federal Wealth Transfer Tax System (JCX-52-15), March 16, 2015,

pp. 24-46.
6

Budgetary effects

Fiscal years 2019-2028

The growth generated by the proposal is projected to reduce the revenue loss from the 

proposal by about $93 billion over the 2019-2028 budget period. At the same time, an increase in 

interest rates generated by the increase in Federal debt is expected to increase the cost of Federal 

debt service by about $7 billion within the budget window. 

The estimate of the impact of the growth effects from this proposal on its budget effects 

was produced using a weighted average of those effects generated by the MEG, OLG, and DSGE

models. The OLG and DSGE models are each assigned a weight of 0.3, while the MEG model is 

assigned a weight of 0.4. 

Overall, economic growth is projected to increase Federal government receipts net of 

increased interest payments by about $86 billion during the budget window. Details of the 

estimate appear on Table 1, following. 

Second and third decade effects

Because the bill is projected to result in a permanent decrease in receipts, the role of 

foresight and fiscal balance assumptions is especially important in analyzing the effects of this 

bill in years beyond the current budget window. Absent some offsetting change in fiscal policy, 

government debt is expected to begin requiring increasing shares of economic resources, 

reducing resources available for private investment. Measured relative to the April 2018 CBO 

baseline, in the decades after 2028, private capital investment and GDP growth are projected to 

slow. While employment is expected to continue to be above baseline projections, GDP is 

projected to become lower under the proposal than under CBO’s April 2018 baseline in the 

decades after 2028; revenue feedback from the policy would decline commensurately. There is 

substantial uncertainty on the timing, and magnitude of these effects, as in any long run analysis.

The differences in the treatment of growing government debt among the Joint Committee 

staff models provide some insight on a key source of the uncertainty. There is substantial 

uncertainty arising from how future Congresses, foreign governments, and investors will react to 

growing deficits. As described in more detail in the Appendix, the three JCT macro models have 

different approaches to modeling a policy that results in growing government debt. The 

immediate fiscal closing assumption used in the DSGE model makes that model less useful in 

predicting this path than the other models. In the OLG model, fiscal closing is assumed to begin 

20 years after the end of the budget window, which means decisions agents make in the second 

decade past the budget window are influenced by the expectation that the debt problem will be 

solved soon. The Joint Committee staff MEG model does not rely on such fiscal closing 

assumptions. Unlike the fiscal closing assumptions assumed under OLG and DSGE, the policy 

under analysis does not change baseline fiscal policy other than the tax policy of H.R. 6760. For 

this reason, Joint Committee staff reduced weights on OLG and DSGE results in analyzing the 

long-run effects of the policy on economic growth in producing this estimate.
7

AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS

Provision 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019-23 2019-28

Conventional Estimate ..................................................................... -0.4 -2.0 -1.6 [1] [1] -0.1 -6.1 -102.4 -250.4 -268.0 -4.0 -630.9

Additional Effects Resulting from Macroeconomic Analysis [2][3].................. 0.2 -0.1 [4] 0.6 -0.4 -0.9 7.9 24.9 24.3 29.3 0.4 86.0

 NET TOTAL .................................................................................... -0.2 -2.0 -1.6 0.5 -0.4 -1.0 1.8 -77.5 -226.1 -238.7 -3.7 -545.1

Joint Committee on Taxation 

-------------------------------------- 

NOTE: Details may not add to totals due to rounding. The date of enactment is generally assumed to be October 1, 2018.

[1] Loss of less than $50 million.

[2] Estimate includes the following effects on outlays due to increased interest rates 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019-23 2019-28

on the Federal debt ........................................................................... [5] [5] [5] -0.1 -0.1 [5] 0.7 2.0 2.1 2.0 -0.2 6.5

[3] Estimate includes the following off-budget 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019-23 2019-28

effects .......................................................................................... -0.3 -0.4 -0.5 -0.7 -0.9 -1.3 -0.5 5.4 5.1 5.6 -2.8 11.5

[4] Gain of less than $50 million.

[5] Increase in outlays of less than $50 million.

 TABLE 1:

Fiscal Years 2019 - 2028

ESTIMATED BUDGET EFFECTS OF 

H.R. 6760, THE "PROTECTING FAMILY AND SMALL BUSINESS TAX CUTS ACT OF 2018,"

[Billions of Dollars] 
8

APPENDIX: DATA:

MODELS, AND ASSUMPTIONS USED IN THE ANALYSIS

The Joint Committee staff analyzed the proposal using the Joint Committee staff MEG 

and DSGE models and an OLG model. While the models are based on economic data from the 

National Income and Product Accounts, taxable income is adjusted to reflect taxable income as 

measured by reporting on tax returns. All three models start with the standard, neoclassical 

production framework in which the amount of output is determined by the quantity of labor and 

capital used by firms, and the productivity of those factors of production; long run aggregate 

demand equals aggregate supply at full employment. Both individuals and firms are assumed to 

make decisions based on observed characteristics of the economy, including wages, prices, 

interest rates, tax rates, and government spending levels. In particular, the amount of labor 

available to the economy is affected by individuals’ understanding of their after-tax returns to 

working, which depends on both wage rates and tax rates. Similarly, the amount of capital 

available to the economy is determined by investors’ predictions of after-tax returns to capital, 

which depend on anticipated gross receipts, costs of factor inputs, and tax rates that affect those 

factors. The underlying structure of the MEG model relies more on reduced form behavioral 

response equations, while the OLG and DSGE models incorporate more theoretical 

microeconomic foundations. 

The degree to which the Joint Committee staff relies more heavily on the results of one 

model versus the others depends on the specifics of the proposal being analyzed. The MEG 

model, which does not require a fiscal balance assumption, is better suited to analyze proposals 

that produce large, conventionally estimated deficits. This model allows for the modeling of four 

separate types of labor, and of separate marginal and average tax rates for all major individual 

and business income tax sources; while the other two models treat average and marginal rates the 

same for individual income other than wages. The availability of investment capital to firms is 

determined by individuals’ savings response to changes in the after-tax rate of return on 

investment as well as by foreign capital flows. Also in the MEG and DSGE models, monetary 

policy conducted by the Federal Reserve Board is explicitly modeled, with delayed price 

adjustments to changes in economic conditions allowing for the economy to be temporarily out 

of equilibrium in response to fiscal and monetary policy. The monetary policy response function 

used in this analysis assumes that the Fed will act aggressively to counteract any demand 

stimulus resulting from the proposal because the economy is expected to be operating near full 

employment. The myopic expectation framework in the MEG model represents the extreme case 

of the degree of foresight individuals have about future economic conditions, in which 

individuals assume in each period that current economic conditions will persist permanently.

At the other end of the foresight spectrum, in the OLG model, individuals are assumed to 

make consumption and labor supply decisions to maximize their lifetime well-being given the 

resources they can foresee will be available to them. They are assumed to have complete 

information, or “perfect foresight,” about economic conditions, such as wages, prices, interest 

rates, tax rates, and government spending, over their lifetimes. OLG represents a class of models 

with “micro-foundations” and life-cycle effects modeled separately for each of a number of 

“generations” (in this case 55). Taxes on labor affect the decisions of each cohort by impacting 

the trade-off between consumption and leisure. Individuals substitute between labor and leisure 

both contemporaneously and over time. The OLG model includes a more differentiated business 
9

sector than the other two models. Firms’ investment decisions respond to the effects of tax policy 

on the projected future value of the firm. Changes in marginal tax rates on firm profits, and 

changes in the value of deductions for investment affect this future valuation. 

The stochastic feature of the DSGE model allows for some analysis of the effects of 

uncertainty about future fiscal policy on the modeling outcome, representing a less extreme 

foresight assumption than either of the other models. As the uncertainty about future fiscal 

conditions is allowed to persist over a limited period of time, DSGE is closer to OLG than to 

MEG on this spectrum. In DSGE there are two types of individuals who make decisions about 

labor supply, only one of whom has the liquidity to make investment decisions (“savers and nonsavers”). As in the OLG model, these two types of individuals make consumption and labor 

supply decisions to maximize their discounted present value of consumption over time, including 

consumption of leisure. The savers supply investment capital to the economy, and receive 

income from investment returns. The non-savers are liquidity constrained, and are unable to 

invest. The existence of these two types of individuals allows for some explicit distributional 

analysis of taxes on investment versus taxes on labor. In addition, changes to transfers and taxes 

on the non-saving households will have direct effects on current period consumption and the 

current level of output. These features of the DSGE model allow the model to interpret real short 

run effects of economic policy changes.

In the OLG and DSGE models, the ability of individuals to foresee changes in fiscal 

conditions means that the agents in the models will be unable to make optimal economic 

decisions if they can foresee a permanently unstable economic future, thus preventing the models 

from “solving” - or completing their simulations. This problem arises in a situation where 

deficits are expected to increase faster than the rate of growth of GDP, which is a characteristic 

under present law as well as the bill. Thus it is necessary to make counter-factual “fiscal 

balance” assumptions about the expected path of deficits for these models. In the MEG model, 

agents are assumed not to foresee that eventually the growing government debt/GDP ratio will 

become so large that it becomes unsustainable, and the model can generate forecasts up until that 

point. 

In the past, the Joint Committee staff has occasionally used only the MEG model to do 

macroeconomic analyses of policies that are projected to increase the deficit significantly.8 Even 

if the fiscal balance assumption is assumed to begin after the budget window, because agents can 

foresee that it will occur, models can project that they will alter their behavior inside the budget 

window in ways that could either augment or counteract the projected effects of the actual 

legislation being proposed. This “anticipation effect” is stronger the closer in time it is to agents’ 

decision making. In recent years, developmental work on the OLG model has allowed the fiscal 

balance assumption to be made 20 or 30 years after the budget window, thus reducing the impact 

of this assumption on behavior inside the budget window. Agents in the DSGE model are able to 

foresee the consequences of the new policy in the bill with certainty for 2.5 years into the future 

 

8

 See, for example, Joint Committee on Taxation, “Macroeconomic Analysis of the American Recovery 

and Reinvestment Act of 2009,” January 27, 2009, in Ways and Means Committee, Report, 111-8 Part I, Providing 

for a Portion of the Economic Recovery Package Relating to Revenue measures, Unemployment, and Health,

pp. 233-240.
10

at any point in time Each quarter after that, they assume there is some probability (which 

increases over time) that the debt-to-GDP ratio will stabilize, thus allowing the model to solve 

and the simulation to continue. After 10 years, debt is stabilized through government 

expenditures. 

Each model also provides a somewhat different perspective on savings/investment 

responses and international capital flows. The MEG model allows simulation of the proposal as 

drafted, with no offsetting fiscal balance assumption, and it models cross-border capital flows 

that can partially offset the effects of a growing deficit on interest rates. The OLG model 

provides some focus on shifting of investment between domestic and multinational corporations, 

as well as within multinational corporations across borders, but requires a fiscal balance 

assumption. The DSGE model provides an additional perspective on savings responses by 

explicitly modeling separate investment responses by savers and non-savers. The DSGE model 

does not model cross-border capital flows, but because this proposal does not change the taxation 

of foreign income, this closed-economy feature is not as limiting in this analysis. 

Each major tax bill potentially presents a unique combination of changes in the definition 

of the taxable base for different sources of income, as well as changes in tax rates on different 

sources of income. Each such combination of changes may present a different amount of 

macroeconomic revenue feedback relative to the change in GDP generated by the proposal. 

Because the Joint Committee staff uses these models to facilitate analysis of tax policy, and to 

estimate the revenue consequences of the macroeconomic effects of tax policy, the staff has 

devoted a considerable amount of time and attention to modeling the specific types of income 

flows affected by proposals, to the extent allowed by other sets of assumptions within each 

macroeconomic model. Information about the effects of the proposal on average tax rates and 

effective marginal tax rates on each source of income, and on after-tax returns to capital and 

labor, is obtained from various Joint Committee staff tax models9

 (used in the production of 

conventional revenue estimates) to characterize the effects of the bill within the each of the 

models. Changes in deductions, credits and exclusions can impact effective marginal tax rates as 

well as average tax rates. 

Tables 2-4 provide a summary of key behavioral parameters used in the each of the 

macroeconomic simulation models for the analysis of this proposal.

 

9

 Descriptions of the Joint Committee staff’s conventional estimating models may be found in JCX-46-11, 

Testimony of the Staff of the Joint Committee on Taxation before the House Committee on Ways and Means 

Regarding Economic Modeling, September 21, 2011, JCX-75-15, Estimating Changes in the Federal Individual 

Income tax: Description of the Individual Tax Model, April 24, 2015, and other documents at www.jct.gov under 

“Estimating Methodology.”
11

Table 2: Key Parameter Assumptions in the MEG Model

Labor supply elasticities in disaggregated labor supply Income Substitution

Low income primary -0.1 0.2

0.1

0.8

0.6

0.2

Other primary -0.1

Low income secondary -0.3

Other secondary -0.2

Wage-weighted population average with baseline rates -0.1

Savings/consumption parameters

Rate of time preference 0.015

Intertemporal elasticity of substitution 0.35

Derived long-run savings elasticity to the after rate of 

return on capital 0.25

Table 3: Key Parameter Assumptions in the

DSGE Model

Frisch elasticity of labor supply 0.20

Production income share of capital 36%

Fraction of savers 48%

Monetary authority response to inflation 1.55

Monetary authority response to output 0.05

Quarterly subjective discount factor 0.9975

Constant relative risk aversion parameter

on utility from consumption 2.15

Intermediate firm markup 13%

Probability of price reset 50%
12

Table 4: Key Parameter Assumptions in the OLG Model

Time preference 0.005

Intertemporal elasticity of substitution 0.4

Intratemporal elasticity of substitution between consumption and leisure 0.6

Leisure share of time endowment 0.4026

Population growth rate 0.008

Technological growth rate 0.019

Capital share for:

Corporate 0.2

Multinational (not including IP) 0.15

Non-corporate 0.3

Housing 0.985

Adjustment cost* 2.0

Debt-to-capital ratio (average) 0.35

Substitution elasticity between capital and labor in

Non-housing** 1.0

Housing** 1.0

Substitution elasticity for intellectual property**** 1.0

* Quadratic adjustment cost function

** Cobb-Douglas production function

*** Substitution elasticity between foreign and domestic after- tax profits attributable to intellectual

 property