Garbage In, Garbage Out: Why Real Revenue Will Lag CBO Forecasts
The third problem is that the agency uses what is known as static analysis. This means that it is not allowed to factor in any kind of behavior change by individuals or businesses resulting from new federal legislation. For example, it absurdly assumes that individuals and businesses won’t take any actions that might reduce their reported taxable income next year when federal income tax rates on the highest-earning 5% of the population are slated to go up dramatically.
Many pundits, think-tankers, and others would like to see CBO incorporate dynamic analysis that would factor an estimate of the impact of changed behavior into its work. It’s one thing to predict lower receipts than static analysis would predict; it’s quite another to forecast and defend how much the change would be.
I don’t think it’s possible with any degree of precision, and it would therefore be a mistake to allow CBO to try. While static analysis is far less than perfect, it can at least be calculated, defended, and understood. Any attempt to apply dynamic analysis would very quickly erode CBO’s hard currency of credibility even more quickly than the mandated assumptions problem previously noted.
That said, sensible politicians have every right — in fact, a duty — to explain why CBO’s static numbers won’t work out as predicted, and why. That’s especially true when it comes to federal tax collections. In the current economic environment, which the Wall Street Journal has called “the uncertainty economy,” and what yours truly has been calling the POR (Pelosi-Obama-Reid) economy, tax collections continue to lag, and Obama administration policies and posturing are the reasons why.
In August of last year, CBO predicted that fiscal collections for the year that will end on September 30, 2010, would be $2.264 trillion, an increase of almost $160 billion over fiscal 2009′s total of $2.105 trillion. Reality stubbornly continues to differ. Barring a last-second surprise, the government’s Monthly Treasury Statement for March will show that receipts through six months are actually down from last year by at least $40 billion. Though collections in February and March 2010 came in a bit ahead of 2009, the turnaround is not yet significant enough to be a trend, especially since collections from individuals who pay quarterly estimated taxes continue to trail last year on a monthly basis.
For the same reasons that receipts are staying in the tank, as well as the history lessons in Items 1 and 3 above, ObamaCare’s tax increases will also not produce the amounts the static-analyzing CBO predicts, while higher spending will cause annual deficits to spiral further out of control. You can take it to the bank.
It is an understatement to say that we’re in a world of hurt if ObamaCare isn’t repealed. We’re not heading into a financial ditch; we’re on the edge of a cliff.
As long as Keynesian economic theory continues to rule the roost in DC, I don’t believe the powers that be will recognize the peril they have wrought in their haste.
Do you mean Keynesian economics or Kenyan? Our Dear Leader seems determined to drive this country to Third World status.
Another reason revenue will fall is reflected in an ‘index’ that the government does not even track!
Businesses to small for the government to take notice of are failing or failing to form.
The author argues that since there is not a universal agreement as to how much tax changes affect economic behavior, we should just stay with the assumption that tax changes don’t affect economic behavior. In other words, since we can’t agree what the perfect answer is, we should just stick with the worst one.
Past experience with tax changes has shown the rough outlines of how the economy responds to changes in tax rates. It shouldn’t be hard to come up with a minimum factor that a large majority of economists could agree to. Then over time, refine that number.
As to the CBO losing credibility if not everyone agrees with the basis for their projections? Heck, the CBO has no credibility now. Not with those who have any knowledge of economics.
#3 Mark, I’m not saying that dynamics shouldn’t be part of the discussion, just that CBO shouldn’t be roped into predicting the degree of dynamism — unless you think an agreed-upon minimum factor can be arrived at. I don’t think it can. If it can be shown otherwise, I’m open to seeing it.
Politicians who believe in supply-side econ need to make the case, either on their own or with the help of the think tanks. If they want to hang a number or percentage of the dynamic difference, they’re free to do so. If they end up being right over time, they’ll get more respect from the voters (and hostility from Keynesians, but they get that already).
Depends on what you mean by “agreed upon”. If it means 100% consensus, then that will never happen. Then again, we don’t have a 100% consensus that the CBO should stick with the static model either. I do believe that there is a consensus that the economy is dynamic, in that it responds to changes in the tax code. It shouldn’t be hard to find a number at which 90% of economists would be willing to say that the dynamic change in tax rates would be “at least this much”.
The goal is not perfection, but a number that is at least marginally less imperfect than the static model.
acworth, I think A.M. meant Kenyanesian.
I would be so bold to say that in the entire history of this country there has NEVER been a government project that didn’t cost more than predicted. Obama’s illusions of health care grandeur for all will take us to the brink of bankruptcy, and probably over the cliff.
Fortunately, the U.S. has survived nincompoop Presidents before, and might this time. However, all the signs of failure are present: high unemployment, a bigger and ever-expanding tax burden, and a struggling housing and auto market. Combined with Obama’s plan to relegate us to third world status, our only hope is the hardworking, decent, honest American people. If they haven’t already, they will catch on to Obama’s antics, and reject them soundly. Doug Schoen, a Democratic pollster says the election results in November will be a unmistakable message from the voters.
As long is no one is hiring, who is going to pay all of these taxes? Unemployed people don’t buy things and they don’t pay taxes.
Aren’t you supposed to always say “non-partisan” CBO? The admin / congress are at war with reality, and so things are continually worse / less / higher… than expected.
It only stands to reason that a static world is easier to define for people of lesser intelligence, such as Congress, bureaucrats…
In the pre-scientific days before the Enlightenment, all models were based on a static, unchanging world. At least those folks had an excuse; today, there is none.
The classic problem with static analysis was exposed back in the 1980s. A Republican in Congress asked the CBO to determine the tax revenues that placing a 100% tax on income over $100,000/year would yield. The analysis stated that it would yield “X” dollars on Year 1, and that revenues would increase by at a 5% compounded rate due to cost of living raises given to those making over $100K annually would be receiving — ignoring the basic fact that once you hit the 100% bracket, you had no incentive to ask for a raise of any kind, and that corporations had less than zero motivation to pay such raises. (After all, salaries reduce profits, so if increasing an employee’s salary provides no benefit to the employee, why reduce profits?)
The CBO has decades of reliable data to use to predict non-static behavior changes. Yes, prior performance does not guarentee future behavior but the CBO knows it is NOT STATIC.
What the CBO can and should do it point to past examples and say something like, “Tax increases on high earners have show an x change in behavior in the past” at the end of their static analysis.
They don’t have to predict exactly what will happen but they should be allowed to point out that …
1) tax increases do not raise as much tax as the static analysis predicts
2) government spending does not keep pace with inflation as the static analysis predicts
The CBO is being used and should not allow that to happen. The longer they do so the less they will be believed as a non-partisan referee … (they may have already past the point of believability)
“I don’t think it’s possible with any degree of precision, and it would therefore be a mistake to allow CBO to try. While static analysis is far less than perfect, it can at least be calculated, defended, and understood. Any attempt to apply dynamic analysis would very quickly erode CBO’s hard currency of credibility even more quickly than the mandated assumptions problem previously noted.”
They should do a dual report. What static analysis shows would happen, compared to what dynamic analysis shows would happen. They keep their credibility, and can spend some time working on their dynamic models.
“I don’t think it’s possible with any degree of precision, and it would therefore be a mistake to allow CBO to try. While static analysis is far less than perfect, it can at least be calculated, defended, and understood.”
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For some reason, this argument reminds me of the story of the drunk who was looking for his keys under the lamp post.