Joint 

Committee on 

Taxation

Inside the JC

Revenue Estimating 

Edward D. Kleinba

Chief of Staff

Joint Committee on Tax

January, 2008
Joint 

Committee on 

Taxation

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PART I: 

Current JCT Estimatin

The TeamBaseline and “As AmenJCT ModelsDynamic MicroeconomQuality Control
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Committee on 

Taxation

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JCT Revenue Estimating 

17 PhD economists specializing in revenue 

10 years average experience in this work

Together with lawyers, policy economists a

16 lawyers3 PhD policy economists2 accountants

An interdisciplinary approach

Every JCT revenue estimate is a joint produand accountant inputThis is unique to JCT and Treasury– others economistsCombination ensures that JCT estimates are actual words of statute – and creative taxpawords

To handle 7,800 revenue estimate requests 
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Committee on 

Taxation

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What is a JCT Revenue 

A JCT revenue estimate compares two prefederal revenues:

3⁄4 Predicted revenues under current law (“Rev3⁄4 Predicted revenues under proposed new law 

Revenues)

The comparison covers the 10-year “budgeOur estimates do not compare “As Amende

current revenues

Estimate compares our predictions of (1) fucurrent law with (2) future revenues under t

Consequence: In a growing economy, JCT “losses” while implicitly predicting higher 

In absence of law change, revenues would hNext slide illustrates this point
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Committee on 

Taxation

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JCT estimated that 2003 Act would “lose” 

These “losses” came against baseline of proResult: Revenue shortfall compared to baseincrease in actual government receipts

Simultaneous Revenue “L

Higher Collecti

Fiscal Year Federal Receipts Current Dollars

0.000

500.000

1000.0001500.0002000.0002500.0003000.000

2002 2003 2004 2005 

CBO January 03 Forecast CBO Forecast plus JCT JGTRRA Estimate Federal 
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Committee on 

Taxation

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The Revenue Base

JCT begins with CBO’s 10-year macroecon

CBO macroeconomic Budget Baseline capteconomy and other long-term trends

JCT then refines CBO’s Budget Baseline to Revenue Baseline specific to each proposeJCT Revenue Baseline applies the current 

We do not predict future Congressional actiWe assume that phase-ins and sunsets will 

JCT Revenue Baseline does predict future j

Future cases interpret what the law is todayRequires JCT economists and lawyers to coRelevant only in unusual circumstancesExamples: Economic Substance, SILOs
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Committee on 

Taxation

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“As Amended” Revenue 

“As Amended” projections require JCT to streams resulting from a hypothetical new tThese projections cannot be a linear extrap

The point of a proposed change in law . . . iTaxpayers will behave differently in the “AProposed new rule may interact with existinExample: increasing the standard deduitemizers to become non-itemizers 

3⁄4 But the AMT may induce some taxpay

years to switch back in later years 

JCT relies on sophisticated tax models to p

life” future tax revenues resulting from ena
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Committee on 

Taxation

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What Is a “Tax Model” 

Many people are familiar with TurboTaxTurboTax saves time and aggravation, but is a tax calculator

It accepts relevant factual inputs (income, detc.) for a yearIt is “hardwired” to calculate the taxpayer’s that year, in light of the tax law’s operative 

TurboTax is static and backward looking

Programmed to calculate one taxpayer’s tax historic factual inputs and actual tax law ruNot designed to project future tax liabilityOnly updated once a year for any actual tax Not capable of adjustment for projected trebehavior
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Committee on 

Taxation

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Tax Models vs Tax C

JCT, by contrast, relies on computer tax m

A computer model simulates reality. It can 

with slightly different inputs, to see the diff

In The Sims (a “virtual world” computer gawith virtual on-screen characters. The virtubut are acting according to the game’s comIn a JCT tax model virtual taxpayers react tnew inputs in a roughly analogous manner

The critical difference between a tax calculmodel is that the JCT model creates a “vireconomic activity, both today and over the 

Virtual taxpayers inside the JCT model are rationally (unlike The Sims!)So the model’s virtual taxpayers react to thetax situations and changes in law by changiminimize their taxes 
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Committee on 

Taxation

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Inside the JCT Individua

JCT’s Individual Tax Model is a “virtual wU.S. individual tax filers

All categories of taxpayersFor each of the 10 years in the budget windTaking into account projected economic, detrends

Individual Tax Model uses 180,000 actual 

Income items and population weights are adcalibrate with the CBO Budget BaselineMissing income or deduction items are “impmethodsThe “imputation” work relies on JCT’s ecoreviews of data sources other than tax returThis work requires a substantial amount of update every year 
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Committee on 

Taxation

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“As Amended” Revenue 

Reflect Behavioral R

Every JCT revenue estimate is a “dynamic” 

3⁄4 Our estimates reflect taxpayers’ predicted r

The Individual Tax Model automatically aimputed data to predict which tax elections the future as a response to a new tax law 

3⁄4 Example: Future itemized deductions by cu

But the tax calculator portion of the Tax Maccount only for limited taxpayer behaviora

JCT’s PhD economists reflect more sophistby drawing on economic literature and their reprogram the “virtual world” of the Tax MBy reprogramming the Model’s internal “rutaxpayers’ projected responses in the “As A
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Committee on 

Taxation

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How Do JCT Tax Model

Taxpayer Behav

JCT economists incorporate taxpayer behavby reprogramming the rules of its “virtual welasticity of supply or demand to proposed 

3⁄4 Example: If gas prices go up $0.50/gallon (

hike), how will taxpayers adjust their consu

3⁄4 Example: If capital gains tax rates are incre

will taxpayers hold onto assets before sellin

But elasticities are tricky to measure!

The response to a $1.00/gallon gas tax hike that of a $0.50/gallon hikeTax packages often involve complex intera

3⁄4 Example: A proposal might both raise the g

taxes for most individuals. One costs consuputs money in their pockets. How will taxpconsumption in that case?
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Committee on 

Taxation

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Quantifying Taxpayer 

JCT’s PhD economists must determine and mathematical terms projected taxpayer resp

That is, they must use the language of mathelasticity of supply and demand in response This information can then be incorporated iinternal rules that govern its “virtual world”

Predicting behavioral responses requires oras knowledge of the relevant economics lit

JCT economists draw on all relevant availacommercial databases

JCT economists consult closely with JCT lthe law and taxpayer planning or avoidance 

This is a critical difference between JCT Reother economic projections
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Committee on 

Taxation

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The Result – A Dynam

Estimate

JCT Tax Models assume that taxpayers wiloptimize their after-tax incomes in the “As JCT economists feed into the relevant Tax of their research on supply/demand elasticinew tax proposalThe resulting “As Amended” Revenue Proj

3⁄4 Changes in the timing of transactions and in

(Example: Realization of capital gains in re

3⁄4 Changes between business sectors or the le

(Example: Organizing a partnership rather t

3⁄4 Changes in types of portfolio investments

(Example: Sell bonds and buy stock to obta

3⁄4 Changes in the amount, types, and timing o

(Example: Employer-provided health insura

3⁄4 Tax planning and tax avoidance (or evasion
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Committee on 

Taxation

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Dynamic Analysis E

Tobacco Excise Tax Hike

JCT starts with the CBO tobacco excise tax JCT expands that data to encompass the detJCT economists research price elasticities orange contemplated by the new tax increaseJCT economists reprogram the Excise Tax conclusions on how smokers will respond t

Some potential smokers will never starSome smokers will decide to quit;Some smokers will reduce the amount 

3⁄4 Example: JCT estimated that SCHIP’s $0.6

would result in 2 billion fewer cigarettes soreflected this smaller tax base
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Committee on 

Taxation

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Dynamic Analysis E

Cap the Exclusion on Employer Pai

Employer paid health insurance is currently show up on tax returns

JCT statistically matches medical expeto each tax return on the tax model in oof insurance coverage for each taxpayeJCT uses data from a variety of sources values to each taxpayer with coverage

JCT calculates the effect of the exclusion cahealth insurance for each taxpayer on the m

JCT uses health insurance price elasticeconomics literature to determine behainsurance coverage and cash wages as 

Revenue estimate represents projected chanafter taking into account the cap amount aninsurance coverage and cash wages
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Committee on 

Taxation

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JCT Quality Control a

Senator/Representative sends revenue 

Primary Economist. Pri

Economist Analyzes Request A

Final review of letter by 

DCOS and COS.

Create revenue estimate and write 

Revenue estimate sent t

Senator or Representativ

Economic Staff Review T
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Committee on 

Taxation

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PART II:

Macroeconomic Revenue 

Why?Why Not?How Difficult?How Reliable?
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Committee on 

Taxation

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“Macroeconomic” Reven

A standard JCT estimate incorporates behaprojecting tax revenues, but assumes that thchanges do not in turn ‘move the needle’ oThis is termed the “Fixed GNP Constrain

Generally assumes that total labor supply aFor example, we assume that a surtax on lataxpayers to retire early, or simply to work 

The alternative is a “macroeconomic” reve

“Macro” estimates incorporate a feedback land behavior are assumed to affect the overwould affect future tax revenues

In a perfect world, all tax estimates would b

Then why doesn’t JCT generally provide “mAnd how much does this hurt the accuracy 
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Committee on 

Taxation

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Imperfect World of F

Fixed GNP Constraint is a practical necess

“Macro” forecasts are extraordinarily time-JCT received about 8,000 revenue estimate 

Fixed GNP Constraint permits reliable comproposals and treats budget’s revenue and s

Consistent with CBO methodology for appr

Fixed GNP Constraint clearly valid for mo

US GNP is $13+ trillion/yearA $500 billion tax change over 10 years = 0Many proposals cause shifts between sectorchange the overall level of economic activitMost proposals move tax laws within relatimacroeconomic feedback effect can be exp
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Committee on 

Taxation

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Reliability Issues in 

Estimates

JCT’s conventional revenue estimatbut they are comparable to each othaccurate rank ordering comparisons “Macro” estimates by contrast are le

Supply-side effects can take several years tEmpirical research papers often do not agreEconomists still disagree, for example, ove2001 $300/taxpayer rebate“Macro” estimates also require predicting uthe Fed’s interest rate movesAnd as described below, “macro” estimates assumptions about how a tax cut is financed

Simple “macro scale back” factors a

They fail to reflect interactions with other TThey fail to back out “micro” behavioral cocaptured by JCT conventional estimating pr
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Committee on 

Taxation

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“Macro” Estimates Do 

Conventional O

JCT and other professionals agree that wellsome predictable positive feedback effects 

by increasing capital or labor supply 

Example: One JCT “macro” study estimatebenefits for a corporate tax rate cut could ra“conventional” estimate

 The magnitudes of these estimated effects c

however, depending on the type of tax cut, 

 Behavioral elasticities (e.g., elasticity of sa Foresight of taxpayers (do households have  Time horizon of taxpayers (do households h How the tax cut is financed

Different types of tax cuts have different “m

A tax cut that did not materially change behdesigned tax “incentive”) would have no pMany economists believe that a “macro” (vapproach is likely to reduce the estimated ccut on capital income more than it would on 
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Committee on 

Taxation

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“Macro” Estimates Depe

on Assumed Financing 

Every tax cut must be financed som

The positive feedback loop (in which ta(or labor) supply, in turn yielding higheyears to play out, and also falls short of A tax cut’s shortfall in revenues therefo

deficit financing (borrowing),cutting government spending, orOffsetting tax increases (i.e, no net tax 

Most analyses (including a 2006 Treconclude that any predicted positive from a net tax cut are dependent on cut with corresponding spending cu

Without corresponding spending reducpredict that most or all of the long-term net tax cuts will disappear
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Committee on 

Taxation

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Both Growth and Welfar

the Spending Cuts C

Any tax cut can be financed by different ty

Cuts in Government purchases of goods/serCuts in Government investment (e.g., bridgCuts in Government transfer payments (e.g

The spending that is cut in turn might be wDifferent assumptions about these aspects oused to finance a tax reduction can dramatiestimated growth effect (i.e., estimated futuAnd, less appreciated, the distributional effdramatically affected by the spending cuts 

For example, cutting transfer payments to fcuts may increase total wealth, but also incr
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Committee on 

Taxation

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But Don’t “Macro” Ana

That Tax Cuts Pay For T

The claim is that we can cut taxes today, bothe shortfall, and repay the borrowing from in the future derived from the tax cut’s posWe are not aware of any peer-reviewed liteconclusion for modern tax rates

“While the supply-side effects of taxes are iare usually not enough to cause tax revenue fall.” – N. Gregory Mankiw, Principles of MMost peer-reviewed criticism of the JCT coapproach makes the more modest claim thaare not as costly as the Fixed GNP Constra

JCT, CRS, Treasury (2006) and others agrewithout spending cuts lead to unsustainable 

“An important feature of this [Treasury’s mis that a permanent reduction in taxes . . . wunsustainable accumulation of government In this type of model, the tax relief is typicaoffsetting change in taxes or spending . . . .study)
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Committee on 

Taxation

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Estimating Conclu

Congress and JCT live in an imperfect woimperfect informationThe current JCT estimating process usually intended purposes (comparing tax proposalJCT has in the past, and should more frequprovide supplemental “macro” information meaningful, and of course as required by HJCT can improve the confidence in, and quthrough greater transparency

More publications on methodological issuePeer review and/or more publication of moGreater use of “backwards looking” validat