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94–395 2016

DYNAMIC ANALYSIS OF THE 

TAX REFORM ACT OF 2014 

HEARING 

BEFORE THE

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

JULY 30, 2014

Serial 113–SRM03 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

DAVE CAMP, Michigan, Chairman 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

DIANE BLACK, Tennessee 

TOM REED, New York 

TODD YOUNG, Indiana 

MIKE KELLY, Pennsylvania 

TIM GRIFFIN, Arkansas 

JIM RENACCI, Ohio 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

JOSEPH CROWLEY, New York 

ALLYSON SCHWARTZ, Pennsylvania 

DANNY DAVIS, Illinois 

LINDA SA ́ NCHEZ, California 

JENNIFER M. SAFAVIAN, Staff Director and General Counsel 

JANICE MAYS, Minority Chief Counsel 

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

PATRICK J. TIBERI, Ohio, Chairman 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

JIM GERLACH, Pennsylvania 

AARON SCHOCK, Illinois 

TOM REED, New York 

TODD YOUNG, Indiana 

RICHARD E. NEAL, Massachusetts 

JOHN B. LARSON, Connecticut 

ALLYSON SCHWARTZ, Pennsylvania 

LINDA SA ́ NCHEZ, California 


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C O N T E N T S 

Page 

Advisory of July 30, 2014 announcing the hearing ............................................... 2 

WITNESSES 

Scott Hodge, President, Tax Foundation, Testimony ........................................... 90 

John Buckley, Former Chief Tax Counsel, Committee on Ways and Means, 

and Former Chief of Staff, Joint Committee on Taxation, Testimony ............ 101 

J.D. Foster, Deputy Chief Economist, U.S. Chamber of Commerce, Testimony 112 

John Diamond, Professor, Rice University, Testimony ........................................ 38 

Douglas Holtz-Eakin, President, American Action Forum, Testimony ............... 50 

Curtis Dubay, Research Fellow, Heritage Foundation, Testimony ..................... 59 

SUBMISSIONS FOR THE RECORD 

The Advertising Coalition ....................................................................................... 139 


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(1) 

DYNAMIC ANALYSIS OF THE TAX REFORM 

ACT OF 2014 

WEDNESDAY, JULY 30, 2014 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON SELECT REVENUE MEASURES, 

Washington, DC. 

The subcommittee met, pursuant to call, at 10:01 a.m., in room 

1100, Longworth House Office Building, the Honorable Pat Tiberi 

[Chairman of the Subcommittee] presiding. 

[The advisory of the hearing follows:] 


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HEARING ADVISORY 

Chairman Tiberi Announces Hearing on Dynamic 

Analysis of the Tax Reform Act of 2014 

1100 Longworth House Office Building at 10:00 AM 

Washington, July 23, 2014 

Congressman Pat Tiberi (R–OH), Chairman of the Subcommittee on Select Revenue Measures, today announced that the Subcommittee will hold a hearing on dynamic analysis of the discussion draft of the Tax Reform Act of 2014, as released 

by Chairman Dave Camp on February 26, 2014. Specifically, the Subcommittee will 

review dynamic analyses of the macroeconomic effects of the draft conducted by outside economists, the role of dynamic analysis in assessing tax reform proposals, how 

dynamic analysis can provide recommendations to strengthen the draft, and recommendations for improving the availability and use of dynamic analysis. The 

hearing will take place on Wednesday, July 30, 2014, in 1100 Longworth 

House Office Building, beginning at 10:00 A.M. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A 

list of invited witnesses will follow. 

BACKGROUND: 

As part of the Committee’s pursuit of comprehensive tax reform, Chairman Camp 

released on February 26, 2014, a discussion draft of legislation intended to overhaul 

the Tax Code. The draft was intended to achieve a simpler, fairer, and pro-growth 

Tax Code. In the interests of transparency and accuracy, the Chairman continues 

to seek feedback from a broad range of stakeholders, taxpayers, practitioners, economists, and members of the general public on how to improve the discussion draft. 

The Joint Committee on Taxation (JCT) serves a critical role in the legislative 

process by providing expert and impartial analysis of the potential effect of proposals to change U.S. tax policy. In evaluating the discussion draft, JCT conducted 

both a static and a dynamic estimate. Under the static analysis, the draft is projected to reduce the deficit by $3 billion over the 10-year budget window. The dynamic analysis released by JCT demonstrates that the draft will increase output, 

consumption, and employment over that same 10-year window. Outside analyses 

performed by a wide array of economists found similar results. 

In announcing this hearing, Chairman Tiberi said, ‘‘Fixing our broken Tax 

Code will strengthen the economy to help employers create more jobs and 

increase wages for American families. Chairman Camp has worked hard to 

produce a tax reform draft that does just that. This hearing provides a 

good opportunity to hear economic analysis on how the draft achieves this 

goal and to learn about more actions the Committee can take to improve 

the draft and the accuracy of our measurements.’’ 

FOCUS OF THE HEARING: 

The hearing will focus on macroeconomic analyses of Chairman Camp’s discussion 

draft and the role of dynamic analysis in evaluating options for tax reform in general. The hearing will address: (1) dynamic estimates of the effects of Chairman 

Camp’s discussion draft; (2) how dynamic analysis can help to assess the impact of 

tax reform; (3) what changes could be made to the draft to achieve stronger growth; 

and (4) what changes could be made to JCT’s models, assumptions, or procedures 

to obtain more transparent, accurate, and robust results. 


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DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit written comments for the hearing record must follow the appropriate link on the hearing page 

of the Committee website and complete the informational forms. From the Committee homepage, http://waysandmeans.house.gov, select ‘‘Hearings.’’ Select the hearing for which you would like to submit, and click on the link entitled, ‘‘Click here 

to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word document, in compliance with the formatting requirements listed below, by the close 

of business on Wednesday, August 13, 2014. Finally, please note that due to the 

change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical 

problems, please call (202) 225–3625 or (202) 225–2610. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, 

but we reserve the right to format it according to our guidelines. Any submission 

provided to the Committee by a witness, any supplementary materials submitted for 

the printed record, and any written comments in response to a request for written 

comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will 

be maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word format and MUST 

NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised 

that the Committee relies on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://www.waysandmeans.house.gov

f 

/. 

Chairman TIBERI. The hearing will come to order. Good morning and thank you for joining us with our subcommittee’s hearing 

on dynamic analysis of Chairman Camp tax reform discussion 

draft, the Tax Reform Act of 2014. 

Today we examine the discussion draft of the Tax Reform Act of 

2014 released by Chairman David Camp in February. The draft attempts to overhaul the Tax Code to create one that is simpler, fairer, and more pro-growth. I applaud Chairman Camp for his work 

on the draft and for working to fix our broken Tax Code to 

strengthen the economy, help employers create more jobs, and increase wages for American families. 

An important goal for any tax reform plan is economic growth, 

and the Joint Committee on Taxation for the first time provided a 


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dynamic analysis of the tax legislation where it found the draft will 

increase GDP by as much as $3.4 trillion and would create nearly 

2 million private sector jobs. 

[The information follows:] 


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f 

Chairman TIBERI. Chairman Camp requested feedback on the 

draft on the JCT analysis on economic modeling generally and how 

to treat dynamic revenue that results from a macroeconomic analysis of the discussion draft. I am pleased that so many stakeVerDate Sep 11 2014 13:26 Jul 08, 2016 Jkt 094395 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\94395.XXX 94395

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holders and economists have offered feedback thus far, and during 

the hearing this morning we intend to examine some of the feedback relating to dynamic analysis. 

The Tax Reform Act is a huge, important step forward in creating a better Tax Code for both individuals and businesses, but 

that is not to say it can’t be improved upon. And that is why Chairman Camp released this as a discussion draft, to gather feedback 

from stakeholders and experts in a public and transparent manner. 

I am looking forward to our great bipartisan discussion today. I 

thank our witnesses for being here and taking the time. I now yield 

to Ranking Member Neal for his opening statement. 

Mr. NEAL. Thank you, Mr. Chairman. Thanks for calling this 

important hearing on dynamic scoring. As many of us know, this 

is an issue that has been around for a considerable period of time. 

And I would note that, as the chairman described, the response to 

Mr. Camp’s proposal on the Republican side, I think it is fair to 

say, was more dynamic than the response on the Democratic side. 

What it does allow is the opportunity to have an open and honest 

dialogue about dynamic scoring today. The witnesses that the committee has put before us are all distinguished. I have known many 

of them in different capacities and have great regard for the suggestions that they have made time and again. It is one of the best 

things about serving on the Ways and Means Committee, you really do hear from good witnesses, and the people that you associate 

with on this committee I think are superb in their talent. 

So with the panel that is assembled today we can finally, I hope, 

put to bed a few widespread and seemingly widely held myths. One 

of the most dangerous is the notion that tax cuts pay for themselves. As congressional observers can verify, the notion that tax 

cuts pay for themselves was a rallying cry for the deficit finance 

tax cuts from the previous decade—and, frankly, the issue has been 

hanging around a lot longer than that—tax cuts that failed to 

produce the job gains and the economic growth that we were promised in the runup to their passage. 

From my perspective, to date this conversation surrounding dynamic scoring has been a bit intellectually short. During the last 

two decades, dynamic scoring has been a way to push tax cuts, 

whether deficit financed or not. 

Do some tax cuts generate income growth? Yes. But to apply the 

assessment that all tax cuts pay for themselves, reduce the deficit, 

or grow the economy really doesn’t make sense economically. 

You should know, I am not categorically opposed to the discussion or the approach to dynamic scoring that will be outlined today. 

I believe that Congress and the Joint Committee on Taxation and 

the Congressional Budget Office should all have the best ideas and 

the opportunity to put those policies forward that will influence the 

overall economic discussion, but not to miss the point that for the 

last two decades dynamic scoring has been a euphemism for enacting large tax cuts. 

The point that is often overlooked with dynamic scoring comes up 

when there are two sides of the ledger. If we are to consider the 

positive effects that tax cuts may or may not have on the economy, 

equally we should consider the positive effects that government 


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spending and investment policies and initiatives would have on the 

economy as well. 

Might I suggest that the dust-up that we are about to have in 

the next 48 hours over a big infrastructure program, I perhaps 

would be all in favor of applying dynamic scoring to the idea of 

what greater efficiencies would be caused by a large infrastructure 

bill based on the notion that we might not be able to predict everything that would happen tomorrow, but certainly over years to 

come it may well inure to the benefit of American people. 

So any time that we are to consider changing how CBO and JCT 

keeps score, we also should also be mindful that these changes 

have lasting consequences, and in doing so we may be undermining 

one of the few remaining nonpartisan and well informed commentators of the Nation’s economic health. I understand the shortterm political gains for pushing tax cuts, but again I caution 

against pursuing this track singularly. 

Let me conclude by thanking the chairman. It has been a joy to 

work with him over the years that we have both served on this Select Revenue Subcommittee. And I yield back my time. 

Chairman TIBERI. Thank you. 

Chairman TIBERI. Before I introduce today’s witnesses, I ask 

unanimous consent that all members’ written statements be included in the record. Without objection, so ordered. 

Chairman TIBERI. We now turn to our panel of distinguished 

witnesses, and I would like to welcome all of them. 

First, Mr. John Diamond, a professor at Rice University in Houston, Texas. 

Thank you for being here. 

Second, Mr. Doug Holtz-Eakin, president of the American Action 

Forum here in Washington, D.C. 

Thank you, Doug. 

Third, Mr. Curtis Dubay, research fellow at The Heritage Foundation here in Washington, D.C. 

Thank you for being here. 

Fourth, Mr. Scott Hodge, president of the Tax Foundation, also 

here in Washington, D.C. 

Thank you for being here, Scott. 

Fifth, Mr. John Buckley, former chief tax counsel, Committee on 

Ways and Means, and former chief of staff for the Joint Committee 

on Taxation here in Washington, D.C. 

Thank you, John, for being here. 

And last but not least, Mr. J.D. Foster, deputy chief economist 

at the Chamber of Commerce, also here in Washington, D.C. 

Thank you all for being here and sharing with us your testimony. 

First we are going to have Mr. Diamond. 

You are recognized for 5 minutes. 

STATEMENT OF JOHN DIAMOND, PROFESSOR, RICE 

UNIVERSITY (HOUSTON, TX) 

Mr. DIAMOND. Chairman Tiberi, Ranking Member Neal, and 

distinguished Members of the Committee, it is a pleasure to 

present my views on the importance of dynamic analysis. 

So why is dynamic analysis important? A popular management 

adage is, if you can’t measure it, you can’t manage it. Dynamic 


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analysis provides valuable information about the effects of policy 

proposals on economic growth, and it is important that we use this 

information to better manage U.S. fiscal policy. Routinely disregarding information on the macroeconomic effects of alternative 

proposals leads to a budget process that undervalues proposals that 

increase the size of the economy and overvalues proposals that 

shrink the size of the economy. We can no longer afford a budget 

process that fails to maximize economic growth. 

We can learn several lessons from three dynamic analyses of the 

Tax Reform Act of 2014, one using the model I developed with my 

colleague George Zodrow at Rice University, one by the JCT, and 

one by the Tax Foundation. 

We find that the Tax Reform Act would increase GDP by 1.2 percent after 5 years, by 2.2 percent after 10 years, and by 3.1 percent 

in the long run. 

The analysis using the OLG model by JCT found significantly 

different results, and there are several explanations for that. One, 

JCT assumes that the initial level of corporate income tax revenues 

lost due to income shifting is 20 percent of the corporate income 

tax base, whereas Dr. Zodrow and I use 24 percent. Also, JCT assumes that excess revenues go to increasing government transfers, 

rather than further corporate income tax rate reductions, as in our 

analysis. 

Further rate reductions enhance growth effects because the associated decline in income shifting allows for further rate reduction 

that is obtained without the negative effects of base broadening. An 

additional difference is that we account for the negative impact of 

base broadening on real wage rates and thus labor supply in the 

model. 

The Tax Foundation found much smaller results, with only a 0.2 

percent increase in GDP in the long run, as the cost of capital increased under TRA, but the Tax Foundation analysis discusses, but 

then ignores the benefits of reduced income shifting, the benefits 

of the reallocation of firm-specific capital to the United States, and 

the benefits of moving to a territorial system. We included these 

important factors. 

The results indicate that a base-broadening, rate-reducing corporate income tax reform is more likely to result in positive macroeconomic effects if the initial amount of income shifting is large 

and is reduced significantly when the statutory corporate income 

tax rate in the U.S. declines; if the accelerated depreciation is retained, instead of being used as a base-broadening provision; and 

if the base-broadening, rate-reducing reform includes a move to a 

territorial system, including anti-base-erosion proposals. 

In addition, base-broadening, rate-reducing individual income tax 

reform can also increase GDP, depending on the size of the rate reductions, the base broadeners chosen, and the extent to which individual income tax reductions are financed by base broadening in 

the corporate sector. However, more analysis is needed, and several 

principles should guide that analysis. 

First, dynamic analysis should be used to compare the macroeconomic effects of various programs. Second, dynamic analysis 

should examine and present results of the effects of groups of provisions separately from the entire proposal. For the Tax Reform 


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Act, it would be interesting to see the effects of the individual provisions, the effects of the rate-reduction and base-broadening provisions in the corporate sector, and the effects of the territorial provisions separately. This would both increase information and increase the reliability of the analysis. Third, the analysis should be 

timely and transparent, with enough information released so that 

others can replicate the results. 

Let me end by noting that JCT has created a great deal of institutional knowledge on microdynamic scoring, and it leads to an immense ability of credibility in those results. I am confident they can 

do the same for dynamic analysis. 

Chairman TIBERI. Thank you, Mr. Diamond. 

[The prepared statement of Mr. Diamond follows:] 


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f 

Chairman TIBERI. Mr. Holtz-Eakin, you are recognized for 5 

minutes. 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, 

AMERICAN ACTION FORUM (WASHINGTON, DC) 

Mr. HOLTZ-EAKIN. Chairman Tiberi, Ranking Member Neal, 

Members of the Committee, it is a great privilege to be here today 

and to again discuss the important issue of dynamic scoring, which 

I had first discussed with this committee over a decade ago. It will 

come as no surprise that I really want to make three points in my 

remarks. First, to endorse the principle of dynamic scoring and to 


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stress that it can be done in a disciplined fashion to rank all proposals in a fair way. Second is to emphasize that it is perhaps most 

important in the area of comprehensive tax reform, to look at all 

the impacts. And then third, to comment briefly on the committee 

draft proposal itself. 

So on the principle of dynamic scoring, as the members well 

know, the idea is to look at the conventional scoring that the CBO 

and Joint Committee would do, which is to look at all of the revenue and expenditure effects in the Federal budget from enacting 

legislation, but to then take the further step of looking at the impact of those proposals on macroeconomic performance, the rate of 

economic growth, the rate of inflation, the rate of unemployment, 

and the like, and the feedbacks that that economic performance 

would have on the Federal budget in both the tax and the expenditure sides, so that you incorporate all of the impacts of moving 

from current law, to the proposal, into the analysis. 

And as a matter of disciplined budgeting and good economic policy, it is important to recognize all those effects so that two proposals that are the same budgetarily but have very different 

growth effects are identified as not the same, but in fact one is inferior and the one that produces more growth is superior. And it 

is important for the committee to have that information, as Mr. Diamond mentioned. 

There are lots of important issues which I lay out in my written 

testimony about how you might want to institutionalize this. It is 

important to have rules, for example, on what monetary policy will 

be doing during the fiscal policy simulations. It is important to understand how to balance the long-run budget in the process of analyzing these proposals. 

But all of these are in fact just rules by which scoring would be 

done. There are a large set of rules by which conventional scoring 

is done at the moment. You can develop rules to do dynamic scoring. And I would encourage the committee to move ahead with that 

so that we have a way to rank all proposals in a fair fashion and 

to bring the economic policy impacts into the discussion. 

It is especially important in tax reform. Tax reform, by definition, is lowering marginal rates, broadening the base. And when 

you do that, two important things can happen. Number one, because tax rates are lower and the base is broader, fewer economic 

decisions are made on the basis of tax influences and more on fundamental business conditions or fundamental preferences of households and you get rid of a lot of misallocations. You get people 

working the amount that they want and not hiding out of the labor 

force, you get capital coming back to the United States from overseas, which is parked there now because of Tax Code reasons, and 

you in general use the labor, the capital, and the technologies in 

the economy better. That makes the economy bigger, and you want 

to recognize that in doing the analysis. 

The second thing is that you can in fact remove some of the double taxation of saving and investment, and provide better incentives for innovation, for accumulation of human capital and skills, 

physical capital investment, and that will make the economy grow 

better. And you want to recognize that in the analysis as well. 


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If you do what you think is a tax reform and those two things 

aren’t happening, you don’t have a good tax reform. It is important 

for the committee to know that the policy can be improved. And so 

I think, in this setting especially, doing a dynamic score should be 

part of the process. 

And lastly, if you look at the committee draft, it has those characteristics. There is a large literature which has looked at the potential benefits of tax reforms, which either push us toward a more 

comprehensive income tax, or in some cases push us to a more 

growth-oriented consumption tax base. The committee proposal is 

at neither of those extremes, but it is close enough to comprehensive reform that it would in fact generate beneficial growth impacts. Our reading of the literature suggests they could be as much 

as half a percentage point over the next 10 years. The estimate you 

have heard before, a little more modest than that. But those are 

important numbers in an economy that is growing too slowly, generating too few jobs, and generating too little income growth for the 

American public. 

So I appreciate the chance to be here today and I look forward 

to your questions. 

Chairman TIBERI. Thank you. 

[The prepared statement of Mr. Holtz-Eakin follows:] 


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f 

Chairman TIBERI. Mr. Dubay, recognized for 5 minutes. 

STATEMENT OF CURTIS DUBAY, RESEARCH FELLOW, 

HERITAGE FOUNDATION (WASHINGTON, DC) 

Mr. DUBAY. Good morning, Chairman Tiberi, Ranking Member 

Neal, and distinguished Members of the Committee. The views I 

express in this testimony are my own and should not be construed 

as representing any official position of The Heritage Foundation. 

Thank you for having me here today to discuss the important 

issue of dynamic scoring and tax reform. I have been working on 

tax reform for a decade now, first at the Tax Foundation, then at 


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PricewaterhouseCoopers, and for the last 6 years at Heritage. In 

that time, I have learned the primary reason we badly need tax reform is to improve the economy’s potential and increase incomes 

and opportunities for all American families. 

Chairman Camp’s recently released tax reform proposal was a 

big step in the right direction for finally achieving tax reform, in 

large part because it included a dynamic estimate of the plan’s income on the economy from the Joint Committee on Taxation. The 

chairman and staff should be applauded for securing that estimate. 

Dynamic analysis is the right way to evaluate tax reform because 

we know that tax reform improves the economy. It does so by increasing incentives for families, businesses, investors, and entrepreneurs to engage in economically productive activities like working, investing, and taking risks, which are the catalyst for economic 

growth. And we know that they all respond to incentives. 

Traditional static scoring hampers task reform’s progress because 

it does not measure how it strengthens the economy. It is incomplete. A tax reform plan with only a static score is like a business 

plan without an estimate of profitability. 

Now, there is certainly a reasonable disagreement over how responsive families and businesses are when tax rates fall. Those are 

reasons to present a range of estimates, using various models and 

an array of elasticities that fall within the mainstream estimates 

from empirical academic literature, not for shunning dynamic analysis altogether. 

As my colleagues in The Heritage Foundation’s Center for Data 

Analysis, or CDA, wrote recently, it is better for estimates of tax 

reform to be approximately right than precisely wrong. Static scoring is precisely wrong. 

CDA conducted a dynamic estimate of the Camp plan. They 

found it would increase economic output by $92 billion per year 

during the 10-year budget window and it would increase employment by 548,000 jobs per year. CDA found these positive impacts 

because of the lower rates on families and businesses the plan institutes in its first few years and the move to a territorial system. 

According to CDA’s estimates, the growth effects of the Camp 

plan taper off the longer it is in place, as policies that increase tax 

on investment, and therefore increase the cost of capital, have time 

to go fully into effect. Those include longer depreciation lives for 

capital and amortization of research and development and advertising expenses. 

To reverse that downward trend and increase the Camp plan’s 

positive impact on growth, current depreciation schedules at minimum would need to be restored and advertising and R&D returned to fully deductible expenses. Lower rates would also help 

make the Camp plan more pro-growth. The top rate under the plan 

is 38.3 percent. That is only 5 percentage points below where it is 

today. 

Chairman Camp understandably chose to adhere to the flawed 

revenue baseline constructed by the Congressional Budget Office 

when making his plan revenue neutral. The revenue target that 

baseline sets is too high, because it assumes that Congress intends 

for expiring tax policies to expire permanently. 


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Under the reasonable assumption that Congress does not intend 

to raise taxes by default, Chairman Camp’s plan could raise nearly 

$1 trillion less and still remain revenue neutral. That money could 

be used to reverse the policies that raise the cost of capital and reduce the plans top rate significantly. 

Chairman Camp’s proposal has given renewed energy to the tax 

reform debate. A key to maintaining that momentum is to make 

sure JCT continues offering dynamic estimates of tax reform and 

other major pieces of tax legislation. The more JCT does dynamic 

estimates, the better it will become at doing them and the more opportunities outside experts will have to help JCT refine its methodology to improve it analyses even more. 

Thank you again for having me here today, and I look forward 

to your questions. 

Chairman TIBERI. Thank you. 

[The prepared statement of Mr. Dubay follows:] 


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f 

Chairman TIBERI. Mr. Hodge, you are recognized for 5 minutes. 

STATEMENT OF SCOTT HODGE, PRESIDENT, TAX FOUNDATION 

(WASHINGTON, DC) 

Mr. HODGE. Thank you, Mr. Chairman, Ranking Member Neal, 

Members of the Committee. I appreciate the opportunity to be here 

today. 

There are many very good reasons to overhaul the Tax Code, 

simplicity and equity, but really economic growth ought to be the 

primary objective. And while we all may want a simpler, more equitable Tax Code, if that kind of a tax system actually leads to less 


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economic growth, we ought to think twice about some of those policies. 

And this is why dynamic analysis must be an essential tool of 

any effort to reform the Tax Code. There are many base broadeners 

that may seem like a reasonable tradeoff for a lower rate when 

measured on a conventional basis, but what we find actually turn 

out to be antigrowth when measured on a dynamic basis. 

And let me echo Mr. Diamond that in order to do tax reform 

right, members should be provided a dynamic analysis of each component of the plan as it is being put together, not just at the end 

of the process after it is all done. And only then will members know 

which components maximize growth and which don’t. 

However, economic growth should not be an accidental outcome 

of tax reform or the process. Before even beginning to think about 

the process of tax reform, lawmakers ought to set out a goal, an 

objective for how much economic growth they hope to achieve as a 

result of their tax reform plan. Any policy that subtracts from that 

goal ought to be rejected. Any policy that adds to it should be accepted. 

And let me echo my colleagues that Chairman Camp’s plan has 

many positive features that by themselves would promote economic 

growth and competitiveness. And chief among those are the lower 

rates on corporate and individual tax rates and eliminating the 

AMT. And when we modeled these policies in isolation with no offsets, we found that they would boost GDP growth by nearly 5 percent and create more than 5 million new jobs. 

And we also found that on a dynamic basis these rate cuts were 

much less costly than they appear on a static basis, as much as 60 

percent less costly for the corporate rate cut and 20 percent less 

costly for the individual rate cut. Actually, the corporate rate cut 

pays for itself beyond the budget window. 

However, what we found is that many of the offsets that were 

required to keep the chairman’s plan revenue neutral on a static 

basis had the effect of dampening the growth potential of the plan 

over the long term. And when we modeled the chairman’s plan, we 

found that the plan would increase GDP by 0.22 percent over the 

long run. 

However, we also found that because the plan raised the cost of 

capital in a number of ways it would reduce the capital stock modestly, which would slightly decrease pretax wages. But because the 

plan reduces marginal tax rates on labor income, it would raise 

after-tax wages slightly, and that in turn would encourage more 

labor force participation and create as many as 486,000 full-time 

jobs. But what these results mean, though, is that people would be 

working longer, but producing less total output with less capital. 

However, what we found was that by modifying just a few of the 

plan’s provisions that raise the cost of capital, we can generate 

even more economic growth. For instance, if we just maintain the 

current MACRS depreciation system, as opposed to the ADS system that is in the current plan, we could boost GDP growth by 1.3 

percent and create as many as 685,000 jobs. 

In a similar way, we modeled the original Camp plan with 50 

percent bonus expensing on a permanent basis, and found that 


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such a plan would increase GDP by nearly 2 percent and create as 

many at 780,000 new jobs. 

Well, before I conclude, I do want to say that the Joint Committee on Taxation does deserve credit for doing a dynamic analysis to the chairman’s plan. However, the JCT does invite some 

criticism of its work because of the rather opaque way in which it 

presents its results, and the lack of transparency in documenting 

how it produces the results that it does. As my seventh grade math 

teacher said, show me your work. And that is what we would like 

to see, because the Joint Committee has made substantial changes 

to their models over the last decade or so, and it is time they subjected those changes and their core models to review by experts in 

the field. And if members are going to have any confidence that 

JCT’s estimates are accurate and it is using state-of-the-art tools, 

then it must allow outside experts to review those on a peer-reviewed basis. 

Well, despite all the criticism, dynamic scoring is really about accuracy, credibility, and having the tools to guide us toward tax policies that promote economic growth and steer us away from policies 

that reduce living standards. And by contrast, the conventional 

static analysis leaves lawmakers in the dark about the economic 

consequences of their tax choices, and to me that is economic malpractice. 

Relying on static scoring turns tax reform into an exercise in 

arithmetic, rather than an exercise in promoting policies that raise 

people’s living standards and the overall health of the American 

economy. 

Thank you, Mr. Chairman. I appreciate any comments you may 

have. 

Chairman TIBERI. Thank you, Mr. Hodge. 

[The prepared statement of Mr. Hodge follows:] 


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f 

Chairman TIBERI. And thank you for endorsing my bonus depreciation bill. Maybe you can work on my colleague from New 

England. 

Mr. HODGE. Anything we can do to help. 

Chairman TIBERI. Mr. Buckley, you are recognized for 5 minutes. 


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STATEMENT OF JOHN BUCKLEY, FORMER CHIEF TAX COUNSEL, COMMITTEE ON WAYS AND MEANS, AND FORMER 

CHIEF OF STAFF, JOINT COMMITTEE ON TAXATION (WASHINGTON, DC) 

Mr. BUCKLEY. Chairman Tiberi, Ranking Member Neal, thank 

you and the rest of the committee members for the opportunity to 

speak before you today. 

I think it is important to understand that all of the models being 

discussed today are models that are based on what I call supplyside principles, the notion that increasing the number and supply 

of people willing to work will automatically translate into greater 

economic growth. I think that theory is no longer relevant when we 

have a world economy where there are virtually unlimited supplies 

of labor overseas and U.S. multinationals responding to market 

outcomes—this is not due to any distortion—responding to market 

outcomes are increasingly accessing those unlimited labor supplies 

to produce goods and services. 

I think the question is quite simple when you look at these models: Is the basic economic challenge facing this country a lack of 

jobs or too few people looking for work? I think we all know what 

the answer to that question is. Yet, the models that we use today, 

that are being discussed today, assume that increases in labor supply will automatically translate into increased economic growth. 

They handle the problem of unemployment in most models by simply assuming it does not exist. 

I think it is important for the members to realize that the models 

have been totally erroneous in their projections in the past. They 

have predicted severe economic issues from the 1993 tax increases 

that did not occur. Indeed, the period following the 1993 tax increase was one of fairly robust economic growth. They projected 

large benefits from the 2001 and 2003 tax reductions. Again, that 

did not occur. 

I think one reason why those projections have been wrong is that 

the models in large respect are divorced from reality. And here I 

want to use Professor Diamond’s model as an example. He does not 

analyze the proposal against today’s economy. He assumes we have 

an economy with no unemployment and an economy where people 

always act in their best interest, guided by the ability, with perfect 

foresight, to foresee the future. 

He does not analyze the actual Camp proposal. He assumes that 

the Camp proposal will be accompanied by massive reductions in 

entitlement programs to bring our budget to a sustainable level. 

The amount of entitlement programs assumed in his model would 

be at least $2 trillion over the next 10 years, with a lot more to 

follow. 

He assumes that the Camp bill will further reduce the corporate 

rate to 20 percent, which does have the effect of reducing the increase in the cost of capital that the prior witnesses have talked 

about that would occur under the actual Camp proposal. 

Mr. Chairman, I think this committee is wise to examine dynamic scoring. I don’t think it is wise to get involved in the argument of which model is best and which assumptions are appropriate. I think they should look at the underlying principles that 


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underlie these models and examine why they may no longer be relevant. 

In the 20-year period preceding 2008, virtually all employment 

growth in this country occurred only in the sector of our economy 

not subject to cross-border competition, and most of that employment growth occurred in health care, government, and retail. Many 

believe that we cannot rely on those sectors any longer for increased employment opportunities. 

Those responses were all due to market forces. A tax reform plan 

based on the primacy of economic neutrality does nothing to reverse the market forces that have caused a loss of domestic manufacturing employment. Indeed, for reasons that have been expressed before, the Camp bill, because it increases the cost of domestic capital, will reduce incentives to invest in the United States 

and therefore could be a long-term drag on economic growth. 

Chairman TIBERI. Thank you, Mr. Buckley. 

[The prepared statement of Mr. Buckley follows:] 


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f 

Chairman TIBERI. Mr. Foster, you are recognized for 5 minutes. 


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STATEMENT OF J.D. FOSTER, DEPUTY CHIEF ECONOMIST, U.S. 

CHAMBER OF COMMERCE (WASHINGTON, DC) 

Mr. FOSTER. Good morning, Chairman Tiberi, Ranking Member 

Neal, Members of the Committee. My name is J.D. Foster. I am the 

deputy chief economist at the U.S. Chamber of Commerce. Thank 

you for the opportunity to testify this morning on dynamic analysis 

of the Tax Reform Act of 2014. 

I always enjoy when an esteemed tax lawyer pretends he is an 

economist. I would love to have the opportunity to give a brief before the U.S. Supreme Court. That would be great fun as an economist. I probably wouldn’t do very well, but I would enjoy it. 

Mr. Buckley notes, quite correctly, that the models we tend to 

use are supply side in nature, and indeed they are, and they do, 

in fact, assume a certain level of full employment. That is the same 

assumption, I should point out, that the Congressional Budget Office makes, that despite the poor performance of our economy in recent years, the economy will, in fact, get to full employment. It is, 

in fact, the forecast of the administration, which forecasts that we 

will, in fact, get back to full employment. 

So one can, of course, question whether or not that will ever be 

the case under current policies, but at least that is the forecast in 

the basis of the modeling. 

Returning to Chairman Camp’s proposal, many lessons have 

been drawn from this, and I will summarize them, the five key lessons regarding dynamic analysis, as follows. 

First, the Joint Tax Committee proved dynamic analysis of tax 

policy can be done credibly, refuting longstanding assertions to the 

contrary by some. 

Second, dynamic analysis remains roughly equal parts art and 

science. 

Three, it remains important to consider a variety of models 

under a variety of assumptions. As they gain experience, analysts 

should be able to settle on a single primary model and assumption 

set. But the tools are not there yet. Consequently, it remains important at this stage to give heed to each model’s results under a 

variety of assumptions. 

And with respect to the tax reform process itself, the most important lesson of all by far, the amount of additional growth required 

from tax reform should be made explicit and specific at the outset. 

Comprehensive tax reform offers a unique opportunity to strengthen the U.S. economy substantially compared to what it otherwise 

would be, but there is a lot of work, as evidenced by the tremendous effort that went into the Camp plan, and it would ultimately 

engage the whole Nation. The expected results should justify the 

effort. 

Proponents of pro-growth tax reform long been handicapped at 

the outset, but in a manner only now apparent. Tax reform is typically required to meet a variety of ex ante, identified, and precisely 

quantified design criteria. One such criteria is revenue neutrality. 

A second is distributional neutrality. Each of these can be justified 

as necessary to reform, but each is likely to limit the ability of tax 

reform to improve the economy. 

In addition, many tax provisions of little or no overall economic 

consequence hover over tax reform. It is likely some would be preVerDate Sep 11 2014 13:26 Jul 08, 2016 Jkt 094395 PO 00000 Frm 00114 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\94395.XXX 94395

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served, further reducing the extent of other changes that would be 

expected to benefit the overall economy. 

In contrast, the most important criterion of all, a stronger economy, has been left generic and loose, and thus repeatedly suffered 

at the expense of the other criteria. 

Tax reform’s chief objective is a stronger economy. Yet, according 

to the body of analysis available to date, an honest appraisal must 

conclude the Camp proposal shows a fairly modest improvement in 

economic performance, likely much less than intended. 

How did this come about? What constrained the effort so that it 

was unable to produce the kind of game-changing economic gain intended and what should be expected? Perhaps the models used for 

data economic analysis are yet too rudimentary to capture properly 

the full magnitude of growth effects from tax reform. Perhaps. 

Much of the answer is certainly that while a significantly stronger economy was the goal, the size of required gain was not specified. As has been common in the past, whatever additional growth 

was anticipated, the result was accepted as the best one could do, 

even if it meant the best was not very much. 

In contrast, major design criteria such as revenue and distributional neutrality were met with fair precision. Put simply, in a contest of competing requirements, this was not a fair fight. Substantially stronger growth never had a chance. Fortunately, the problem being clear, the solution is equally clear. Tax reform should 

proceed with a definite, specific, realistic, and quantified goal for 

a stronger economy. 

Deciding tax reform’s goal for economic improvement is a debate 

unto itself. To advance the debate one could contemplate an economic growth budget. How much economic growth is lost to current 

policy and how much economic growth are we willing to spend 

through the Tax Code? The analogy to tax expenditure analysis is 

obvious. Here we are not talking about the revenue effects of individual provisions, but rather the aggregate economic effects of tax 

policy overall. 

Among competing goals, economic growth should be treated as 

first among equals in the formulation of comprehensive tax reform. 

As we have learned, this requires the goal to be explicit, not merely 

a stronger economy, but how much. Such an explicit goal also 

means we will have a clearer understanding of the economy budget, how much economic growth we are willing to give up through 

the Tax Code to achieve noneconomic goals. 

Such a goal and such a debate is only possible because of the 

progress to date in dynamic analysis. This progress must continue 

for the analysis to be credible, and reliable, thus for the projected 

economic improvement to be credible, and thus for the comprehensive tax reform to be surely successful. 

Thank you, Mr. Chairman. 

Chairman TIBERI. Thank you, Mr. Foster. 

[The prepared statement of Mr. Foster follows:] 


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f 

Chairman TIBERI. Before I ask a question, Mr. Buckley, you 

took issue with a portion of Mr. Diamond’s written testimony. I 

would like to comment on a data point in your testimony—in your 

written testimony—that I believe is incorrect, in your main thesis 

about the effects of the Camp draft on business investments. You 

rest this claim that the Camp proposal, and I am going to quote 

from your written testimony, ‘‘would result in a net $590 billion tax 

increase on corporate income and business income of individuals,’’ 

end of quote. 

So you cite the JCT macroeconomic analysis for this quote, but 

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ysis. In fact, the $590 billion claim includes revenue raisers on 

pass-through businesses, but ignores the benefits of actual cuts in 

the individual rate on those same businesses and completely ignores the AMT repeal on those same pass-through businesses. And 

while we don’t have exact numbers, the business tax cuts amount 

to hundreds of billions of dollars, wiping out a large portion of 

those tax increases that you cite. So I just wanted to make that 

point. 

Mr. BUCKLEY. Mr. Chairman, may I respond—— 

Chairman TIBERI. At the end of my questions, you may. 

So going to my question, and I would like to ask Mr. Hodge this 

first, a number of you, including you, Mr. Hodge, recommended 

changes to the discussion draft and argued that the tradeoff between tax reduction and cost recovery is particularly difficult. 

There are several temporary tax policies, as you know, that are 

designed to speed up cost recovery, but which Congress only extends on a temporary basis, many times retroactively. We have had 

this debate. I have introduced, as you know, a couple of those that 

have both passed the House. One, bonus depreciation, which you 

mentioned. Another, Section 179 small business expensing. Permanent on both without offsetting them with raising taxes elsewhere. 

So, first, do you think that we should assume these policies are 

permanent for purposes of defining tax revenue neutrality and distribution neutrality? That would be one question. 

And second, how do you believe including permanent versions of 

both of these policies as part of the Tax Reform Act of 2014, without the need to offset them with higher taxes elsewhere, would increase economic growth through tax reform—— 

Mr. HODGE. As I mentioned, Mr. Chairman, we modeled the 

Camp proposal with 50 percent bonus expensing on a permanent 

basis and found that it significantly increased the growth potential 

of the plan. And we have actually modeled your proposal on its own 

and found that it would achieve quite considerable economic 

growth, create jobs, and more importantly, lower the cost of capital, 

which would be a great benefit to workers, it would provide them 

with better tools. 

And we found that generally when it comes to expensing provisions or provisions that allow full cost recovery, that in the long 

run cost recovery or full expensing ends up paying for itself. In 

fact, our model shows that it has greater economic benefits than 

simply lowering the corporate tax rate. We think both should be 

done, and they should be done at the same time, and then you will 

get even greater economic growth. 

But certainly I think those are the kind of provisions that, unfortunately, because of the static requirements that Chairman Camp 

was working under, required this tradeoff. And we really don’t 

think it was necessary. You could have done both. You could have 

lowered the rate and moved toward expensing, and that would 

have boosted tremendously the growth potential of the plan. 

Chairman TIBERI. Mr. Holtz-Eakin, your thoughts on that—— 

Mr. HOLTZ-EAKIN. The issue of the baseline is an important 

one. And right now the baseline has this tremendous asymmetry 

where if a spending program exceeds $50 million it is extended indefinitely regardless of whether it has been reauthorized by ConVerDate Sep 11 2014 13:26 Jul 08, 2016 Jkt 094395 PO 00000 Frm 00125 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\94395.XXX 94395

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gress or not, but a comparable provision on the tax side is assumed 

to expire, and it leads to an imbalance, in my view, in the way policies are evaluated. 

The top criteria should be to treat proposals in a fair fashion, 

and that is a fundamental asymmetry that is built into it. I would 

treat them both the same, thus the bonus depreciation would be extended. That has been the practice of the Congress, that would be 

the baseline if we had symmetry between the tax and the expenditure side. And so, I think you should do that, and you would get 

better information about the real budget outlook, and if you do the 

dynamic analysis you get better information about the economic 

policy. 

Chairman TIBERI. Mr. Diamond. 

Mr. DIAMOND. I agree with their analysis. I think it would be 

interesting. I think the JCT has actually looked at this in a dynamic analysis and I think that was very useful. I do take and actually used a version of an OLG model, and I take issue with four 

of the five points that Mr. Buckley raised. 

Chairman TIBERI. I thought you would. 

Mr. DIAMOND. He was correct on one. But he said it is only 

supply-side effects, but the 2003 act used my model and we found 

negative effects in the out years, so that is directly contrary to your 

testimony. 

You dis the idea of perfect foresight, but two very prominent 

economists in 1987, in a book called ‘‘Dynamic Fiscal Policy,’’ on 

page 10, give this reasoning for perfect foresight: Perfect foresight 

may seem extreme, but it is actually very useful. Actual deviations 

in individual behavior are both likely to understate and overstate. 

So one household may overstate wages and one household may understate wages. 

So perfect foresight is kind of the perfect average. But he argues 

for using a myopic model. A myopic model systematically gets the 

wrong answer, so you assume everybody makes the same mistake 

every period. How can we possibly want that type of model over an 

OLG model, which has a much more reasonable side. So again, that 

is Auerbach, Kotlikoff page 10. 

Supply and demand analysis, it is only supply side. That is false. 

My model includes both a labor supply and a labor demand. Firms 

have a derived labor demand. So we have both demand and supply 

effects. If only supply were to increase, what you would get is you 

would get an increase in labor supply, but you would also get a reduction in the wage rate. And I would expect any of my Econ 201 

students to be able to point that out on a test question. 

Finally, this issue of, what do you do with these huge projected 

budget deficits? And his response is that the model is totally unrealistic because we don’t deal with it. We don’t actually assume 

there is a massive reduction in transfer payments. I just assume 

not to look at it, because I can’t tell you how you all are going to 

solve that problem. 

But I can tell you this: If I assumed that the problem was solved 

by tax increases, then that implies that tax rates would be higher 

and economic distortions would be larger, and thus the positive effects of tax reform would be bigger, not smaller. So if I am wrong 

anywhere, I am wrong for underestimating the size of the effects. 


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Chairman TIBERI. Mr. Buckley. 

Mr. BUCKLEY. Thank you, Mr. Chairman, for the opportunity 

to respond. First of all, my numbers come out of the Joint Committee analysis. What is indisputable from the Joint Committee 

analysis, and from some of the prior witnesses, is that the Camp 

draft will increase the cost of domestic capital, leading to projected 

reductions in business investment. That is the result of the Joint 

Committee analysis using their own derived model. 

The point I am trying to make about the economic assumptions 

is that they are quite unrealistic. It is not ultimate full employment that is assumed in some of these models, it is that we have 

a full employment economy today and at all times. 

Increases in labor supply can automatically translate into increased economic growth only an economy of full employment, otherwise they just add to the current surplus of unused labor supply. 

These are I think important issues. 

Now let me apologize if Professor’s Diamond’s model got it right 

in 2003. Then Representative John Kasich stood on the floor of the 

House of Representatives and said every economic model in this 

country projects that this bill is a job killer. And they were wrong. 

These models I think are very imperfect guides to policy. We 

have a world with unlimited labor supply overseas. If we do not 

enact policies to increase the competitiveness of U.S. businesses in 

the world economy, the increased labor supply will not be utilized. 

Chairman TIBERI. Okay, thank you. We could have a good debate here. I am going to ask Mr. Foster to comment on my question. 

Mr. FOSTER. Thank you, sir. 

I think this might be time to refer to something I wrote in my 

testimony regarding the process with which one would use dynamic 

analysis in practice. And it starts with how CBO does its beginning 

forecast. First, we get some sense of where the economy is today. 

That in itself is difficult. Then CBO has a projection for potential 

output. That shows we are at full employment whenever we get 

there, where we would be, and how that trajectory goes over time. 

And then the forecaster has to figure out some way to draw the 

line so that we go from where we are to the potential. 

What dynamic analysis really does, done properly, is to shift that 

potential, hopefully up. And then we figure out how does that 

change the trajectory from where we are to the new potential in 

going forward. It doesn’t assume in practice that we are instantly 

at full employment. We use that for modeling exercises now because we are still learning how the models work, but in practice 

one would never do that, any more than CBO today in doing an 

economic forecast, or the administration, would say, okay, we think 

instantly we are at full employment. 

Now, if we are at full employment, that is fine, today we are not 

there. So, one would not use that sort of methodology. We are still 

learning the models, and so we go to the abstraction of assuming 

we are at potential output today. That is not how dynamic analysis 

would ever be used in practice. 

Chairman TIBERI. Thank you. 

Mr. Dubay, do you want to add anything to that? 


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Mr. DUBAY. That is exactly what I was going to say, that tax 

reform is about increasing the economy’s potential. So when you go 

back to, say, the 1993 tax hikes, it would be more accurate to say 

that the economy won’t be as strong because of them. We probably 

would have had stronger job growth had we not raised taxes in the 

early 1990s, during that decade. Same thing goes for the tax cuts 

in the early 2000’s, the economy wouldn’t have grown as strongly 

as it did had we not cut taxes at that point. 

On the issue of the extenders, I think it does hinder tax reform, 

because think about it, according to Chairman Camp they had to 

replace a trillion dollars of revenue they wouldn’t otherwise had to 

had you had an equal treatment between tax policy and spending 

policy under the CBO baseline. So that means that Chairman 

Camp was forced into even more difficult choices, which included 

having to extend depreciation lives, which cut down on the growth 

potential. So I think it is important to equalize the treatment so 

that we can get better tax policy going forward. 

Chairman TIBERI. Thank you. 

Mr. Neal is recognized. 

Mr. NEAL. Thank you very much, Mr. Chairman. I would like 

to submit for the record a series of posts from Bruce Bartlett, who 

served in the Reagan and Bush senior administrations, as well as 

working on the staff of Representative Kemp and Ron Paul. 

Chairman TIBERI. Without objection. 

Mr. NEAL. Thank you. 

I don’t think as we pursue this discussion that the argument 

should come to one side favoring tax increases. We are trying to 

figure out the manifestation of sound policy that will promote economic growth. I think we can all agree upon that. 

And at the same time, I must tell you, as you practice economics, 

you can see how that doesn’t always translate into the certainty of 

the speeches on the House floor or the meetings in the Oval Office, 

as I heard Vice President Cheney when I was invited, it was just 

a handful of us, to the Oval Office within days of Bush junior becoming President, and we went back and forth on tax policy as the 

President laid out his proposal. 

And the President asked me what I thought, and I thought it 

was a very honest opportunity for the conversation. And I suggested, Mr. President, why don’t we do some modest tax cuts for 

middle-income Americans and continue to pay down the debt? The 

rejection didn’t come from the President, it came from Vice President Cheney, who had served with me in the House in a prior life. 

And I call that to your attention, because even though you give 

us speculation, which I think is very important as to what outcomes might occur based on what policies, that is not the way it 

is translated in the course of a campaign. And that is part of the 

difficulty with the soundness of what has been offered here today 

in terms of discussion. 

Now, Mr. Buckley also referenced a key point. I remember that 

discussion as we closed the debate on Clinton’s budget in 1993. And 

the principal architect in the House at the time of dynamic scoring 

was the majority leader, Dick Armey. He argued, juxtaposed with 

the position of now Governor Kasich, two points. 


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One, if we embraced that budget that Clinton offered in 1993— 

and by the way, credit to Bush senior for the courage that he demonstrated—but if we embraced that Clinton budget in 1993, one of 

them said, it will take us to fiscal Armageddon. 

The other said as the debate closed with the lights dimming, and 

I recall it vividly, we would head toward the greatest depression 

since the depression of the 1930s by endorsing and embracing that 

budget. 

Instead, two budgets from Clinton and one from Bush senior took 

us to the greatest spurt of economic growth in the history of the 

company. 

Mr. Eakin, appreciating the honesty that you frequently bring to 

these discussions, could you see a path of using dynamic scoring to 

bring about a sound infrastructure investment proposal for the 

country, trying to measure those outcomes—— 

Mr. HOLTZ-EAKIN. I think there is no reason to restrict insights into economic policy to just the tax side of the budget, there 

is no question about that. I think, if I could—I don’t want to take 

too much time—— 

Mr. NEAL. No, please. 

Mr. HOLTZ-EAKIN [continuing]. It is important to recognize 

that this is a scoring issue and that most of scoring is about ranking alternative proposals. There are a lot of claims about accuracy. 

There will always be inaccuracies in this process, static, dynamic, 

whatever you want to liable it. The future is a very difficult thing 

to predict, period. 

But you should do your very best, as CBO does now and the 

Joint Committee does now, to sort of put yourself in the middle of 

the range of outcomes, it could be higher, it could be lower, try to 

get it right in the middle, and systematically rank things in the 

right order. And that is the most important thing that you would 

do if you brought dynamic scoring into the process, is get the 

rankings right, reflecting the best of our ability to model the economics. 

The second thing I would say is, these are models. There is a lot 

of criticism about how they are not reality. They are not supposed 

to be reality. The whole point of a model is to extract from reality 

key features you care about. What are the key features for economic growth, put those in a model, see the growth impacts. And 

for that reason you shouldn’t say, this is what is going to happen. 

You should say, this is what is going to be improved by this proposal, although the future may happen however it may be. 

And so I don’t think it does any good to say, well, there was a 

claim about a model and then we end up having rapid growth or 

a claim about a model and we had bad growth. Those are two different thanks. 

Mr. NEAL. Thank you. 

Mr. Buckley, one of challenges that is facing us is this notion of 

the worker participation rate. Today’s announcement that the economy grew by 4 percent—and we still note there are too many people working part time and who are underemployed—and would you 

finish the position that you were offering earlier with Mr. 

Tiberi—— 


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Mr. BUCKLEY. Well, my view is that what you need for longterm economic growth is for the United States to be competitive in 

the world economy. And that requires incentives for domestic investment, whether it is bonus depreciation or current law, you need 

investments in human capital so our workers are more productive 

in the world economy. 

We have a world economy now. Our companies are very good at 

accessing this vast supply of labor overseas. And again, let me repeat, all because of market outcomes. This is not a distortion in 

economic. They are going overseas because the market tells them 

to do it. 

We need to have policies to encourage them to stay here with investments in physical capital and human resources that will make 

our economy more productive in the long term. You should note 

some of these projections of economic growth assume that people 

work longer at lower wages because of the decline in capital investment. That is not my vision of how to improve our long-term economic situation. 

Chairman TIBERI. Thank you, Mr. Neal. Having worked for 

John Kasich for 8 years, he certainly doesn’t need to be defended 

here. But what I think he would say, which I have heard him say 

a whole lot of times, is that maybe the trajectory changed because 

of the 1994 election, where the House was taken by Republicans 

and the Senate was taken by Republicans and the trajectory of 

spending and the regulatory environment changed. That is what he 

would say. Again, he doesn’t need defending, but since he is not 

here, he would take issue with a couple of those statements. 

I recognize Mr. Paulsen for 5 minutes. 

Mr. PAULSEN. Thank you, Mr. Chairman. And we appreciate all 

the testimony from the witnesses. 

I am going to start out more specifically, then expand a little bit 

more broadly, and I am going to reference a specific tax that was 

included actually in—repealing a specific tax that was included in 

the Camp draft. It has had a very negative impact on companies 

in Minnesota, in my State and around the country. It is the medical device excise tax. And studies have shown that this excise tax 

has led to job reductions, hiring freezes, reduced investments in research and development and capital infrastructure in the medtech 

industry. 

Mr. Holtz-Eakin, I will just start with you. Can you please describe maybe how repealing this tax and potentially reversing some 

of these trends could generate economic activity that could be incorporated into a dynamic analysis, and what would the overall effect be of repealing the medical device tax under a dynamic analysis look like—— 

Mr. HOLTZ-EAKIN. Well, as you know, the American Action 

Forum has actually done some work on the medical device tax and 

found that it does have negative impacts on employment in that 

sector, on investment and innovation in that sector. Those are 

analyses that one can capture under conventional scoring and 

should, but the conventional scoring would then have to take those 

employees and put them somewhere else in the economy, take the 

income that is lost there and have it generated somewhere else in 

the economy. Putting that into the dynamic analysis, along with 


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the other features, gives you a better trajectory of long-run investment, innovation, and growth. 

I would say that as a matter of practice you don’t want to have 

to do full-blown dynamic analysis on every proposal. Only large 

ones merit that kind of treatment. 

Mr. PAULSEN. And then I will just expand a little more broadly 

then. One of the most important parts of developing tax reform legislation is analyzing the tradeoffs between lower rates and then 

those provisions that narrow the tax base. And, Mr. Hodge, you 

mentioned earlier that dynamic scoring is really about accuracy, 

credibility, having the tools that guide us toward tax policies that 

promote growth. 

Now, some of the provisions are of little economic benefit that 

are in the code right now and clearly should be eliminated to help 

lower rates, but other provisions have significant economic effects 

that must be weighed very carefully against the benefit of lower 

rates. In the various models that all of you have looked at or used 

to estimate the economic effects of the discussion draft, which revenue raisers, other than general depreciation rules, have a material 

impact on the economy—— 

I can just start with Mr. Diamond, and we can just kind of go 

down. 

Mr. DIAMOND. Well, any of the revenue raisers that affect the 

cost of capital would have had the largest impact on the growth effects. So accelerated appreciation, the research and investment 

credit, other things like that. In addition, revenue raisers on the 

individual side, you would want to get the revenue raisers that promote the most efficiency in the economy. So maybe reforming the 

mortgage interest deduction would have increased growth because 

it would have reduced the difference in the tax treatment of business capital and housing capital. And so some reform on that front, 

which I have written on previously, would also help to alter the 

proposal to get bigger growth effects. 

Mr. PAULSEN. Mr. Dubay maybe. 

Mr. DUBAY. Yeah, I agree. I agree. Anything that increases the 

cost of capital has depressing growth effects. One thing, I look at 

the 10 percent surtax as a pay-for, so that raises that top rate up 

to 38.3 percent, so I look at that as an opportunity to increase 

growth by getting that further down. 

Mr. PAULSEN. Good point. 

Mr. Hodge. 

Mr. HODGE. Yeah, I would echo all of those, and I would also 

throw into the mix the capital gains treatment. And while the 

chairman’s proposal doesn’t really increase the effective capital 

gains rate that much, we think it would have some material effect. 

And I think, if anything, we should be reducing the capital gains 

rate back to where it was prior to 2 years ago when it was raised 

to 20 percent, or now it is 23.8 percent. 

So all of those things can materially affect the growth potential 

of these plans, and really, it is the cost of capital, I will just echo 

everyone else’s sentiment on this, that is the driving force here. 

Mr. PAULSEN. Mr. Foster, just from the chamber perspective, 

just the cost of capital. Any other observation? 


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Mr. FOSTER. Well, the general rule is that the Tax Code inherently distorts economic activity, and so any movement in tax reform towards reducing those distortions, any at all, is beneficial. 

What we are not always very good at in economics is determining 

which ones are most harmful to economic growth and which are 

not. But the cost of capital, I think we all agree on this panel, is 

certainly very, very important. 

Mr. PAULSEN. Mr. Chairman, I see my time is almost expired. 

I yield back. 

Chairman TIBERI. Mr. Larson is recognized for 5 minutes. 

Mr. LARSON. Thank you, Mr. Chairman. And let me reiterate 

what my distinguished colleague, Richie Neal, had to say before 

about the importance of these hearings and our distinguished panelists and commend the chairman for providing us the opportunity 

to learn from sources, exceptional sources, and people that have a 

great deal to say and have a vast amount of knowledge as well. 

And this comes at a critical time in our economy and a critical 

time when people are thinking through going through a decisionmaking process. It also comes at a time when Congress, I believe, 

is at a 7 percent approval rating with the American people. And 

part of the reason that Congress is at that juncture is because people have a hard time seeing any action or believing what they are 

saying. 

So what I always like to do is to try to apply what I call the 

Augie & Ray’s test to this. Now, I am not an economist, nor am 

I an attorney, and so these are not pure, econometrics are not 

going to be applied here. But what you do get at Augie & Ray’s is 

an unfiltered view of the world. 

So, for example, listening here today, I am impressed with the 

varying ways that you can look at the impact of the GDP. But at 

Augie & Ray’s, they would say, don’t talk to me about the GDP, 

talk to me about the JOB. And it is the JOB that the American 

people are concerned about. 

So it is great that we have this discussion, but how would you— 

and I am going to start with Mr. Buckley—how would you translate this? Because I think it is the responsibility of Congress to 

demystify these things for the American people so we can build the 

trust amongst them that policy and decisions like this are important. But how is it that this is going to impact my local manufacturers and those guys that stop by Augie & Ray’s, how is a family 

household impacted by this? What kind of metrics? Or, I forget who 

used a term, I thought it was very good, what kind of measurements do we have with respect to that impact on those individuals 

that we can translate into meaningful policy—— 

And I will start with Mr. Buckley. 

Mr. BUCKLEY. Well, I think the first thing you want is a positive business environment in the United States and positive incentives for investment in the United States. I think one agreement, 

if you are looking for a bipartisan agreement on this panel, is that 

the Camp bill increases the cost of domestic business, capital, and 

in the long run it is a negative for investment in the United States. 

Now, it has a particularly large impact on capital-intensive industries, largely manufacturing. When people on this panel say it 

increases the cost of capital, they are talking about the average 


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cost of capital. It doesn’t increase the cost of capital much for financial services businesses because they do not utilize research and 

development expensing or accelerated depreciation. 

It will have a particularly adverse impact on those segments of 

our economy that utilize those incentives. They will see the biggest 

increase after cost of capital. And it is those types of jobs that I 

believe are necessary for middle-class growth and income. And it 

is those types of investments, and I would say investments in 

human capital as well, that are necessary for the United States to 

be productive or competitive in an economy that has worldwide 

flows of capital. 

Mr. LARSON. Isn’t this the same problem that we are faced with 

and other cognizance that the full committee has with trade over 

this same issue? It is a global economy, and yet this distrust at 

home amongst individuals over the fact that it is easier for jobs to 

go overseas, and we get left out in the process. And manufacturing 

seems to be depart and goes where the lowest common denominator, in this case labor is, so for reasons of profitability. You suggested earlier that we need to have incentives to be here. Do the 

rest of the panelists agree with that, do you think? 

Mr. DIAMOND. I agree that we need to have incentives. I agree 

with most of what Mr. Buckley just said. On the topic of dynamic 

analysis, I think there are measures in the models that would be 

useful, and we need to look beyond strictly looking at GDP. And 

Mr. Hodge referenced this earlier, is you can have a positive GDP 

response when capital is declining, and so the GDP response is 

purely showing that people are working harder. But people like to 

consume both goods and leisure, so if increases in GDP come only 

from increased hours at work and possibly lower wages as demand 

and supply in the models equilibrate, that would be a bad thing. 

In my model, I mean, you can look at employment, at wages, you 

can actually look at welfare, so you could see, and welfare would 

be a measure that is based on how much consumption do you have 

both in terms of consumption goods and in leisure time, and then 

we can measure this theoretical version of welfare. And going back 

to Dr. Holtz-Eakin’s point, this isn’t a projection that is meant to 

say this is exactly the right number. These are meant to compare 

alternative proposals so that we can reach and manage the U.S. 

economy to the highest potential growth path. 

Chairman TIBERI. The gentleman’s time has expired, but anyone else want to comment? Mr. Hodge, you want to comment? 

Mr. HODGE. Just very quickly. I think getting to your point on 

how tax reform can benefit the average person, you can see that 

in dynamic analysis. For instance, when we analyzed on a dynamic 

basis bonus expensing, if you look at that, the distributional effects 

on a static basis, it shows that average people don’t benefit at all. 

But when you look at it on a dynamic basis, after those economic 

effects have flowed through to pretax incomes, you see that the incomes of everybody have grown by about 2 percent. 

That is the real benefit of a dynamic analysis, especially on a distributional basis. You get to see the effects on real people after the 

economic consequences have flowed through to their wages. 

Chairman TIBERI. Mr. Holtz-Eakin. 


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Mr. HOLTZ-EAKIN. I think if you are talking to your constituents, you can say, look, we have three problems that we know 

about. We have too few people working. The people who have jobs 

are not getting raises, income is not going up. And we are at a disadvantage in the global economy, our competition is not fair. 

So you could fix some of that with trade, but if you are just talking on tax policy, you can say, look, here is a proposal that the dynamic analysis says improves GDP growth. What does that mean? 

That means initially more people are working. You can produce 

more because more people work. That is a jobs problem. Eventually, everyone who wants to work is back at work, and GDP can 

only go up by making them more productive and generating more 

income. That means they are getting raises. That is good. 

And some of these proposals would actually level the playing 

field between U.S. and international global competitors. That 

would be great for purposes of the location of activity in the United 

States. So this is about getting jobs, getting raises, and keeping our 

companies here, and that is what it is about. 

Chairman TIBERI. Very good. Thank you. The gentleman’s time 

has expired. 

Mr. Marchant is recognized for 5 minutes. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

Several of you have recommended changes to the discussion 

draft, and in each case you have argued that the tradeoff between 

rate reduction and cost recovery is difficult. There are several temporary tax policies that are designed to speed up cost recovery, but 

which Congress only extends for short periods of times and often 

retroactively. The House has recently voted to make two of these, 

bonus depreciation and Section 179 small business expensing, permanent without offsetting them with higher taxes elsewhere. 

First, do you think we should assume these policies are permanent for purposes of defining revenue neutral and distributionality 

neutral tax reform? Mr. Diamond. 

Mr. DIAMOND. I actually find that a hard question to answer, 

so I will speak specifically to bonus depreciation. The effects of 

bonus depreciation are much different whether it is passed on a 

permanent basis or a temporary basis. If people think bonus depreciation is going to be temporary, it could cause firms to invest in 

the window and then would lead to decreased investment outside 

of the window; whereas, if bonus depreciation is permanent, you 

would have a more constant rising up of investment. And so over 

a time path, we get very different effects. 

So I am not sure how we should make that assumption. I think 

it is going to be proposal by proposal we would have to think about 

that differently. But for bonus depreciation, I think it is a pretty 

complex proposal to look at. 

Mr. HOLTZ-EAKIN. I will just repeat what I said earlier, which 

is for constructing baselines I think you should have equal treatment, and the current treatment is unequal. You could fix that by 

having the tax law sunset and the spending program sunset, or you 

could fix that by having current policy extended on both sides. It 

is my judgment that again and again we have done Section 179, 

we have done bonus depreciation, it is a sensible assumption to 


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treat those as permanent in the baseline until the Congress behaves differently. 

Mr. DUBAY. I agree with Mr. Holtz-Eakin. I think we should be 

looking at these as permanent policy. There is a question at some 

point. At some point, all these policies were put into place with an 

expiration, so they were temporary at one time or another, but once 

Congress extends them one or two times, it is subjective as to what 

criteria you use, but once you have extended them a couple of 

times, at that point you should assume that they are permanent. 

It has a great benefit to having a consistent baseline everyone can 

agree on. 

So one of the silver linings from the fiscal cliff tax hikes from last 

year, we have a much closer current law and current policy baseline. And I think we should be looking at the current policy baseline for revenue to continue that process of getting all on the same 

page. 

Mr. MARCHANT. Let me ask a follow-up question on this before 

I hear from the rest of you. How would including these permanent 

versions of these policies as part of the Tax Reform Act of 2014, 

without the need to offset them with higher taxes elsewhere, increase the magnitude of economic growth inside of that reform—— 

Mr. DIAMOND. So for bonus depreciation, JCT actually provided 

a dynamic analysis in a committee hearing, and so they found that 

bonus depreciation would increase GDP by two-tenths of a percent. 

So that would be double the—— 

Mr. HODGE. I think they also found that it raised revenue. 

Mr. DIAMOND. It raised revenue. Yeah, it increased the capital 

stock by 0.6 to 1 percent. 

Mr. HODGE. Paid for itself. 

Mr. DIAMOND. So, I mean, it would be substantial, especially 

considering the size of the policy, when you are talking a 0.2 percent increase in GDP for a policy that has a relatively small revenue impact. 

Mr. MARCHANT. Mr. Chairman, one last question. 

In countries such as Canada that over the years have lowered 

their corporate tax rate, and other countries that have, have they 

used a dynamic score, have they used a static score, or have they 

used projected surpluses in revenue to use up to pay for those—— 

Mr. HODGE. Every country has done it a little differently, Congressman. Canada has been just cutting their corporate tax rate 

with hardly any offsets against those rate cuts. In fact, they have 

seen corporate tax revenue stay very steady throughout the entire 

period of time, even during some of the recessionary period, and 

largely because of income shifting. They are benefitting from income shifting in propping up their corporate tax collections. 

A country like Slovakia is a very interesting case. When they 

passed a flat tax more than a decade ago, they sought analysis, dynamic analysis, from about seven several different parties, including like the IMF, World Bank, local universities, and then their 

own treasury. And then they found one that they felt was probably 

more realistic, somewhere in the middle. 

I think that is a pretty good model. Let’s look at outside, have 

Mr. Diamond, have Tax Foundation, have others do an analysis 


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and then compare them. I think that is a fairly reasonable way of 

looking at what the economics profession is doing. 

The British Treasury just did a dynamic analysis of their corporate tax rate cuts and found that it produced substantial benefits 

and increased revenues as a result. So I think this is where the economics profession is moving, and I think it is time that we did the 

same. 

Chairman TIBERI. The gentleman’s time has expired. 

Ms. Sa ́nchez is recognized for 5 minutes. 

Ms. SA ́ NCHEZ. Thank you, Mr. Chairman. 

And thank you to all of our witnesses for joining us today. 

Before I get into my questions, I have to say that I am a bit disappointed by the fact that JCT, who are the people who did the official nonpartisan dynamic scoring for the Republican tax draft, 

were not invited to be here on the panel today to discuss their 

work. 

And I also hope that this is not the last of our discussions about 

the desperate need for tax reform at the Federal level, because 

every day that the Congress waits to do tax reform is another day 

that we are falling further and further behind other jurisdictions 

who understand the need to reform. 

I certainly don’t purport to agree with all of the provisions in the 

Republican tax reform draft, and that is a draft that has not gotten 

a lot of warm embrace from its own caucus, but I do believe that 

that discussion draft deserves some discussion, and very thoughtful 

and deliberative discussion, about the substance of the bill itself 

because we have really not had that in this committee. Today we 

are here to talk about economic modeling. 

So because we are here today to talk about the economic modeling, Mr. Buckley, I am hoping that you can explore some of the 

assumptions that go into this model. For example, some of the 

models that have been discussed assume that the permanent debtto-GDP ratio is flat or that consumers make the perfect economic 

decision they ever will encounter in their lives, or that every person 

who wants a job can have a job. And what do you think the possible effects of making those assumptions that exist in these 

modelings, what do you think the effects of that are ultimately? 

Mr. BUCKLEY. Well, I think the effects are that the model results are not necessarily very predictive of what would occur in the 

real world, but I think it is important to understand on the assumption of GDP, stability of debt to GDP, these models, most of 

the models simply will not project a result unless you fix the longterm budget situation in the United States. There is no positive impact from these policies unless you do that. And the modelers’ 

choice of assumption makes a very big difference in the models’ results, assuming reductions in entitlement benefits give you the biggest long-term growth. 

Ms. SA ́ NCHEZ. It was stated earlier that the models are not 

supposed to reflect reality, but why can we not inject a little bit of 

reality into some of these models? 

Mr. BUCKLEY. Well, let me take this opportunity to praise what 

the Joint Committee staff did in its model, because it did model reality. It modeled the existing economy with temporary substantial 

unemployment. It did model the current unstable long-term budget 


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situation. It didn’t assume that we did it. It modeled a situation 

where it has been criticized that people are myopic. I think it is 

fairly reflective of our ability to predict the future. 

So it did make a very good faith effort to model. I may disagree 

with the underlying theory of it, but it did, and it showed very 

modest increases in growth. And the modest increases in growth all 

come because of the individual tax reductions. The net effect of the 

business changes is negative. 

Ms. SA ́ NCHEZ. Thank you. 

I am sure that all our panelists today, the tax analysis departments of all your organizations probably did dynamic analysis of 

the 2001 and 2003 tax cuts. Is that correct? And a simple yes-orno answer will suffice. No? Mr. Holtz, no. 

Mr. DIAMOND. I was at the Joint Committee on Taxation at the 

time. 

Ms. SA ́ NCHEZ. Okay. 

Mr. DIAMOND. Yes, we did. 

Mr. HOLTZ-EAKIN. My experience with that was at the CBO. 

We did a macroeconomic analysis of the President’s budget, which 

included the 2003 tax provisions. 

Mr. DUBAY. I was not at the organization then. 

Ms. SA ́ NCHEZ. Okay. 

Mr. HODGE. No, the Tax Foundation didn’t do that at that time. 

Ms. SA ́ NCHEZ. Mr. Foster—— 

Mr. FOSTER. I was not with the chamber at the time. 

Ms. SA ́ NCHEZ. Okay. 

Mr. Buckley, do you think that dynamic growth projections that 

were done for the 2001 tax cuts would have likely shown a tremendous amount of growth potential like the analysis that we see 

today—— 

Mr. BUCKLEY. I think if you used the conventional supply-side 

models, you would have seen a much larger growth response because they were net reductions in tax. The Camp bill is revenue 

neutral, so these models can’t show a big increase in long-term 

growth because you are just moving liability around. In 2001, those 

were substantial tax cuts, and the way these models work, it would 

show big economic growth. 

Ms. SA ́ NCHEZ. It would show big economic growth, but how 

does that compare to the actual economic state of the U.S. in the 

2000s, which, I might add, were a result of two unfunded wars, an 

economic crisis in our financial sector, a tanking housing sector, 

trillions more in debt from an unpaid Medicare Part D program, 

and of course, over a trillion in un-offset tax cuts—— 

Chairman TIBERI. The gentlelady’s time has expired. You may 

answer quickly. We could have a debate. 

Mr. BUCKLEY. Her question answered itself. The results were 

not positive. 

Chairman TIBERI. Thank you, Mr. Buckley. 

Ms. SA ́ NCHEZ. Thank you very much. 

Chairman TIBERI. Mr. Young is recognized for 5 minutes. 

Mr. YOUNG. Thank you, Mr. Chairman, for holding this hearing. 

I think this has been quite instructive. I think it is very important. 

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duced some legislation in support of dynamic scoring and his leadership in this area. I cosponsored that legislation as well. 

All of you have done dynamic analysis of the Camp draft. I certainly appreciate that and your efforts here. 

I actually think this should be a bipartisan effort. I mean, this 

is about evidence-based policymaking. And I have actually discovered, outside of the klieg lights and C–SPAN coverage and so forth, 

that it is a bipartisan initiative to dynamically score a range of different policies, from immigration reform bills to transportation bills 

to tax bills. 

I am a member of the No Labels Group, a group of conservatives, 

liberals, and everything in between where we periodically convene 

and talk about issues of the day and try and find some common 

ground. In our last meeting, over coffee, roughly a dozen Republican and Democrat Members came together, and I think on that 

day there were eight Democrats, four Republicans, there was nearly universal agreement in the need to dynamically score all our legislation moving forward. 

Now, we can quibble over the details, but as I see dynamic scoring, let me sort of recharacterize this issue very similar to the way 

Mr. Dubay did. We can either be wrong all of the time by adopting 

this artificial static model, and it indeed is a model as well, or we 

can be right some of the time through dynamic analysis, and 

through an iterative process learn from our suboptimal models and 

make all of our assumptions very clear to the public and to the best 

minds in the country and the policymakers alike and improve upon 

those models. 

I would add that we could do static analysis along with dynamic 

analysis and use the static analysis as a baseline and then compare 

which models perform better over a period of years, and ultimately 

perhaps transition into what I suspect would be a strictly dynamic 

analysis environment. I think that is the way to go. 

With respect to tax reform specifically, if we consider the baseline under a dynamic analysis, fewer offsets would be needed to 

reach budget neutrality. And I think we therefore can work in a 

bipartisan fashion to do things under a dynamically analyzed tax 

reform model. We can extend the R&D credit, Section 179, the 

Earned Income Tax Credit, LIFO, accelerated depreciation. We can 

eliminate regressive taxes like the medical device tax. 

Now, do you agree—I will ask Mr. Dubay—if the committee were 

to consider dynamic growth as part of its budget-neutral analysis, 

that the risks of a dynamic score being wrong are outweighed, perhaps significantly outweighed, by having extra revenue to use on 

keeping provisions intact, like Section 179 at the $500,000 level, 

that inarguably encourage growth? Yes or no, if possible. 

Mr. DUBAY. Yes. I look at dynamic scoring as a more accurate 

answer than static scoring. It is not that it is right or wrong. It is 

certainly more accurate. Because as I said in my testimony, we 

know that tax reform will improve economic growth. Static scoring 

doesn’t take into account those impacts. So we know that it is 

wrong and we know it is wrong in which direction. So we know 

that dynamic scoring gets us closer to the right answer. 

Mr. YOUNG. Right. 


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So progress occurs in all realms, science, any area of academia, 

in our economy, in policymaking, through an iterative process, or 

it out to occur through an iterative process, through trial and error 

and improving upon suboptimal results. Same thing should apply 

with respect to tax policymaking. 

Same thing should apply with respect to our analysis. I so was 

encouraged to hear of this notion of microdynamic analysis. We 

need to look at specific provisions of our Tax Code and other areas 

of policy, major ones, as Mr. Holtz-Eakin emphasized, in a dynamic 

way as well. Now, if that requires additional staffing at Joint Tax, 

this is an area where I am willing to invest in a few more staffers 

to ensure that we have more optimal growth-oriented policy that 

will increase the number of jobs, increase personal income, and so 

forth. 

The last thing I would add is just emphasize that this doesn’t 

have to, at least initially, be an either/or sort of question. We could 

have both and then transition into the one that is proven to work 

best over a period of years. I would start with dynamic analysis for 

PAYGO purposes. 

But thank you so much for being here. I yield back. 

Chairman TIBERI. Ms. Schwartz is recognized for 5 minutes. 

Ms. SCHWARTZ. Thank you, Mr. Chairman. I appreciate the 

time and the conversation this morning. Just a couple of points and 

then a couple of questions, if I may. 

One is that in this whole discussion about the use of dynamic 

scoring and economic growth, it does seem that—two particular 

points—suggesting that cutting taxes is always good for economic 

growth is kind of the suggestion here a bit. I think many of us who 

do actually think that there is an opportunity for us, Republicans 

and Democrats, to work together to lower rates, broaden the base, 

to really look at tax deductions in the way as to what works and 

what doesn’t and what stimulates the economy and what doesn’t is 

very real. 

But the notion that tax cuts alone lead to economic growth is one 

that has been disproven time and time again, obviously tax cuts for 

the wealthiest and tax cuts for the wealthiest people and the 

wealthiest corporations. We have been promised that. If it worked, 

we would maybe not be in some of the situations we have been in, 

in the past. So it makes many of us very skeptical that that itself 

is not enough for us to build a basis for tax reform. It just isn’t. 

The second point is that economic growth really may mean different things to different people, and we sort of use that terminology as though it is the same thing. Does economic growth only 

mean growth in the GDP, which of course it has to be accounted 

for, but is it just an increase, the wealthy get much wealthier, 

which is kind of where we have been in the last decade, or does 

it also mean that the middle class gets wealthier? 

And does that matter to anybody on the panel, is kind of the 

question. Should it matter to us? It is actually what has made this 

country great, by the way, is not just entrepreneurs and great corporations, but it is also people with the skills and the ability to 

take these jobs and be paid a fair wage and buy products. 

So I think that what we have to look at is to understand that 

we should take into account, and I think Mr. Young said this, take 


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into account some of the dynamic scoring you are talking about, 

but it is not the only rationale for what we do. We have to look 

at our ability to meet our obligations in this Nation. We have to 

look at our ability to have the revenues we need to educate our 

people, to be able to compete economically in this world, to be able 

to grow that middle class. And then we have to be able to make 

some of that infrastructure transportation investment so in fact we 

can also compete in the global marketplace. 

If we can’t do those things, then just creating more wealth in this 

Nation will change who we are in this country, and that is one of 

the questions we need to actually say, are we comfortable with that 

and really a great disparity between the very rich and everybody 

else? 

So here is my question really. As we look at the use of dynamic 

scoring, if we look at economic growth, I was going to ask Mr. 

Buckley, you touched on this, could you speak to how that incorporates in any way, if it does, the income inequality that has been 

happening in this country for the last decade, in particular, the 

issue you raised of wages and the competition from overseas? If we 

are really going to be a low-wage country with high wealth and 

low-wage workers, what does that mean to our competition overseas? Could you speak to what in some ways, I might understand, 

the narrow definition of economic growth without looking at that? 

And my second question, if you would speak to what would be 

the impact on the economy if we actually do not have the dollars 

to make the investments in education, in workforce training, and 

in infrastructure that has been so key to making our country such 

a great economic powerhouse that it might be and helps businesses 

to grow and to locate and to stay here. 

Mr. BUCKLEY. Well, first thing, when you look at the models, 

labor elasticity is higher at upper-income levels, so that upper-income individuals have the luxury of working or not working, and 

therefore these models have supported rate reductions that are disproportionately at the top. I think that is unwise for many reasons. 

Now, the other thing, and here I may differ a little bit, or differ 

a lot, with my other people here. Dynamic scoring is, what you are 

essentially saying, we want to take into account the positive impacts of our policy decisions today. That is a luxury that we do not 

permit our corporations to make. They make investments, and they 

make investments with the expectation that the return in the future is going to be far in excess of the cost of the investment. But 

they cannot say, our investment we are making today is less costly 

because we anticipate income. 

I believe you have to have kind of objective rules for budgeting. 

If the policy choices are wise, the positive impacts of those policy 

choices will flow right into future budget projections. 

Chairman TIBERI. The gentlelady’s time has expired. 

Ms. SCHWARTZ. Thank you. 

Chairman TIBERI. Mr. Reed is recognized for 5 minutes. 

Mr. REED. Thank you, Mr. Chairman. 

Mr. Hodge, you said something in your testimony, and believe it 

or not, we do listen to the testimony, and I was listening to your 

verbal testimony. 

Mr. HODGE. Well, thank you. 


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Mr. REED. And I found it very intriguing. You said something 

about peer review, transparency, making the scoring process much 

more open to review by the public as well as people in positions 

that could comment on that process. I wholeheartedly agree. This 

is a conversation, coming to Congress in 2010, I have had repeatedly with different individuals in the position that do the scoring. 

And one of the things that was brought back to me and that we 

had a conversation with in response to my request to get the black 

box, to get the magic assumptions, to get the calculations was, well, 

if we give you that information and we tell you how we do this, 

people may manipulate, work around, abuse, whatever term you 

want to use, their proposals, their legislation, to get the score that 

they want. And I was actually kind of amazed by that because I 

am a firm believer in transparency and I am a firm believer, if people are going to do that, that will stick out as you go through the 

process. 

Have you ever heard that response from any of the folks, be it 

at the CBO or JCT, in regards to the pushback on disclosing these 

assumptions? 

Mr. HODGE. Well, I will say somewhat cynically that I guess it 

shows that the Joint Committee really does believe tax policy 

changes behavior, that people will work around these things. And 

they are doing it now. I mean, the 10-year budget window used to 

be 5 years, and if you made it 15 years, then people would work 

around that. 

No, transparency is the key here because it is the only way of 

understanding whether or not the tools that the committee is using 

are meeting current standards within the economic community. 

There has to be transparency. I would volunteer to come in and 

demonstrate our model to any one of you. It sits on a laptop. We 

can come in. I will show you what is behind the curtain. I will show 

you all the assumptions. I will show you the data that is behind 

it. I will show you the equations. You can pick them apart. 

Mr. REED. The algorithms and everything else. 

Mr. HODGE. We are happy to come in and demonstrate it for 

you. In fact, the committee ought to have that in front of you so 

that during a hearing you can do macroeconomic analysis, dynamic 

analysis during a markup. 

Mr. REED. Now, just so we are clear, Mr. Hodge, I mean, the 

bulk of my conversation generally was not with JCT. It was with 

CBO and CBO representatives on the budget side. And they have 

got the same type of process of assumptions and algorithms and 

things over there. 

Doug, have you ever dealt with that issue? And I think we have 

talked about this before. 

Mr. HOLTZ-EAKIN. Well, I am handicapped by having actually 

done the job. 

Mr. REED. Yeah. 

Mr. HOLTZ-EAKIN. And it is important to recognize that scoring 

is not a model. Scoring is a judgment exercise. I scored the Terrorism Risk Insurance Act, first time it was passed. There is no 

model for that. I had to score a death benefit for people killed prior 

to the invasion of Iraq. There is no model for that. 


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And so while it is useful to have models that incorporate the impact of beneficial and bad policy so that you know what is going 

on, in the end this will always be at the CBO and at the Joint 

Committee an act of judgment. 

Now, CBO has in its cost estimates something called basis of estimate. It has an obligation to be transparent about how it came 

to its conclusions and to lay out the judgments it made. But I think 

it is a fool’s errand to pretend that somehow this is a machine and 

that you can change parameters or inspect parameters and know 

exactly what is going on. You should get good staff, respect their 

judgment. 

It is important to the integrity of the Joint Committee that you 

not micromanage it. And there is a big difference between transparency, saying this is the conclusion to which I have come, and 

scientific replicability, and you will never get the latter and should 

not get the latter. 

At CBO, I used proprietary data from large pharmaceutical companies to do the Medicare Modernization Act. There is no way that 

should be disclosed to anybody. So that estimate could not be replicated. And so it is important to think about this not as if it is scientific replicability of an experiment, but instead building an institutional culture for good judgments informed by all the information 

that is relevant. Those are two very different things. 

Mr. REED. But would you not agree that if the institution assumed the wrong assumption or exercised the wrong judgment, 

that would be a problem, that we would not be able to see whether 

or not that was erroneously achieved—— 

Mr. HOLTZ-EAKIN. It has to explain how it came to its conclusions. I think that is an obligation of both the CBO and the Joint 

Committee. It is in the statute now. They may or may not be meeting that obligation successfully. I think that is a fair complaint. 

At that point, if you look at how they did it and say, no, wait, 

there is a lot of evidence that the judgment you drew here is just 

incorrect, we have tons of data, they should be updating constantly 

their ability to do that estimate well. I have no quibble with that. 

And I believe that the CBO, while not perfect, has tried to do that. 

If you go to the CBO with additional data, if you go to them with 

additional research, they will incorporate that into their view of the 

scoring process. 

Mr. REED. I appreciate it. Thank you for the input. 

Thank you, Mr. Chairman. I yield back. 

Chairman TIBERI. Thank you. 

Mr. Neal, would you like to be recognized—— 

Mr. NEAL. Thank you, Mr. Chairman. I thought this was very 

helpful. I thought the panel was very informed. And I hope that 

you might consider down the road scheduling Joint Tax to come in 

and talk about the proposal as well. 

Chairman TIBERI. Certainly will consider it. 

Speaking of Joint Tax, sitting behind Mr. Gerlach the entire 

hearing has been the head of Joint Tax, professionally, Tom 

Barthold. 

Thank you so much for being here. And I particularly want to 

thank you and your macroeconomic team and staff for the analysis 


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and all the hard work that you put into the Camp draft. We do 

very much appreciate it. 

And Mr. Neal and I were talking about the witnesses today, and 

I think we both agree, topnotch panel, excellent testimony from all 

of you. It has been a real educational, informative discussion. Important to understand the importance of dynamic scoring, the limitations of dynamic scoring, and modeling in general. I think it always is helpful to help committee members as we continue to try 

to develop tax reform legislation that will help increase wages, help 

create jobs, and help grow our economy. 

So it has been a real pleasure to have you all here. We do appreciate the time that you took today. And that concludes today’s 

panel. 

[Whereupon, at 11:40 a.m., the subcommittee was adjourned.] 

[Submissions for the Record follow:] 

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