Revenue Assumptions in the Roadmap
Wednesday, February 17, 2010
Some observers have claimed that the revenue assumptions in the Roadmap may be overly optimistic. A related claim is that Congressman Ryan’s staff directed the Congressional Budget Office (CBO) not to analyze and score the tax elements of the Roadmap, and instead provided CBO with revenue assumptions that have not been scrutinized or verified. The overall implication, therefore, is that the Roadmap does not achieve its stated goal of balancing the budget over the long term. These statements are misleading.
- Congressman Ryan’s staff asked CBO to analyze the Roadmap’s long-term revenue impact and CBO declined to do so because revenue estimates are in the jurisdiction of the Joint Tax Committee (JCT). JCT does not currently produce revenue estimates beyond the traditional 10-year scoring horizon.
- Based on consultations with the Treasury Department and other tax experts, the Roadmap’s tax rates were formulated to produce revenues equivalent to the current tax code.
- The revenue levels in the Roadmap track CBO’s “alternative fiscal scenario,” which already reflects the “revenue loss” from the extension of 2001 and 2003 tax relief and the Alternative Minimum Tax (AMT) patch.
The following document provides more information on these points: 1) explaining why CBO did not explicitly analyze the tax portion of the Roadmap; 2) describing how Congressman Ryan’s staff formulated their revenue estimates and why staff are confident in their accuracy over the time horizon of the plan; and 3) clarifying other related questions and criticism.
Critique: Congressman Ryan’s staff asked CBO not to analyze and score the tax elements of the Roadmap.
- In fact, Congressman Ryan’s staff did ask CBO to analyze both the tax and spending provisions in the Roadmap. However, CBO declined to do a revenue analysis of the tax plan, citing that it did not want to infringe on the traditional jurisdiction of the Joint Committee on Taxation (JCT). The JCT is responsible for providing the official revenue score of legislation before Congress. JCT, however, does not have the capability at this time to provide longer-term revenue estimates (i.e. beyond 10 years). Given these functional constraints for an “official” analysis, staff relied on its original work with the Treasury Department and other tax experts to formulate a reasonable expected path for long-term revenues given the tax policies in the Roadmap combined with long-term expectations for economic growth.
Critique: The revenue assumptions in the Roadmap are overly optimistic.
- The tax policies in the Roadmap were designed to raise yearly revenue amounts that are generally on par with the historical average in the U.S. (roughly between 18 and 19 percent of gross domestic product (GDP)). Congressman Ryan and his staff consulted and worked with outside experts, including the Treasury Department, to formulate the specific tax policies and tax rates that would meet this revenue goal over the long-term horizon of the plan. For instance, the new tax rates, tax brackets and standard deduction amounts in the Simplified Tax as well as the tax rate of the Business Consumption Tax (BCT) were calibrated to meet the intended revenue objective.
- Actual yearly revenues tend to fluctuate with the strength of economic activity. For instance, revenues are currently well below their historical average (just 14.8 percent of GDP last year) and are expected to remain depressed in coming years due to a sluggish recovery from the recession. The Roadmap accounts for this by tracking a baseline that incorporates current revenue policies (permanent extension of 2001 and 2003 tax relief along with an Alternative Minimum Tax (AMT) patch) and the significant slowdown in economic activity (i.e. below-average revenue amounts through 2012). Eventually, as economic activity picks up, revenues in the Roadmap plan rise back up above 18 percent of GDP, finally reaching the intended maximum amount of 19 percent of GDP in 2029.
- The Roadmap is a long-term plan and the natural pressures on revenues over the long term are weighted upward, not downward. For instance, over time, increases in real economic activity tend to push individuals into higher tax brackets, which leads to higher overall revenues. This phenomenon, known as “real bracket creep,” is a key reason why most long-term revenue forecasts tend to drift upward even when tax policies are assumed to be fixed. (For instance, CBO’s “alternative fiscal scenario” baseline assumes that all of the 01/03 tax provisions are extended and the AMT is patched for inflation, but revenues still increase to 20 percent of GDP by mid century due in part to real bracket creep.) Over time, this same phenomenon would put upward pressure on revenues in the Roadmap.
- The Roadmap offers individuals a choice to pay their taxes under the current IRS code or a new, streamlined Simplified Tax. Some have raised a concern that this tax system could be gamed (individuals simply choose whichever system results in a lower tax bill from year to year) and lower-than-expected revenues could result, at least over the near term. It is important to note, however, that there are important restrictions on this choice. Individuals cannot switch between tax systems each year; they must choose one tax system within ten years of the plan’s enactment and stick with it over one’s lifetime (though there is one changeover allowed as well as the ability to switch tax systems when an important life event, such as marriage, fundamentally changes one’s filing status).
- On net – balancing the potential for higher-than-expected revenues over the long term due to real bracket creep against the potential for lower-than-expected revenues over the short term due to the ability to choose a tax system – staff is confident that the tax policies and tax rates in the Roadmap meet its revenue objective over the long term.
Critique: The Roadmap would lead to trillions of dollars in revenue losses.
- It is always important to examine the underlying baseline against which a plan is measured in these statements.
- The tax plan in the Roadmap is designed to generally track the CBO’s “alternative fiscal scenario” baseline for revenues. As a result, the Roadmap has fully accounted for any “revenue loss” that results from CBO’s “alternative fiscal scenario.” As noted above, this baseline assumes that all of the 2001/2003 tax provisions are extended and the AMT is permanently patched for inflation (i.e. current tax policy as we know it is extended in future). In contrast, the so-called “current law” baseline assumes much higher revenue amounts because all of the 2001/2003 tax provisions are repealed after this year, as dictated under current law, and the AMT is not indexed for inflation, allowing it to hit more and more middle-class taxpayers each year.
- As a result, CBO’s current law baseline for revenues is $3 trillion higher over 10 years than its alternative fiscal scenario, meaning that any proposal aiming to track current tax policy would automatically be judged as losing $3 trillion in revenue relative to current law.
- The current-law revenue baseline already builds in a host of tax increases that virtually no policymakers are proposing. Relative to this current law baseline, any tax plan that doesn’t implicitly raise taxes significantly is labeled a major revenue loser. It is telling, for instance, that the Tax Policy Center scored Presidential candidate Obama’s tax proposals and concluded that it would “lose” over $2.9 trillion in revenue over 10 years, relative to current law.
Critique: The tax proposals in the Roadmap resemble the tax plan of former GOP presidential candidate Fred Thompson. The Tax Policy Center estimated that this plan would reduce tax revenues by between $6 trillion and $8 trillion over 10 years.
- First, the Thompson plan was scored against a “current-law” baseline, which assumes significantly higher taxes in future years due to the expiration of all the 2001/2003 tax relief provisions and an AMT that is not indexed for inflation (i.e. the AMT is allowed to increase the tax bills of more and more middle-income taxpayers each year). Measured against this baseline, any tax proposal that attempted to keep the tax burden where it is today would be judged to “reduce” revenues by $3 trillion over 10 years. As noted earlier, it is worth pointing out that the Tax Policy Center also analyzed Presidential candidate Obama’s tax proposals and concluded they would reduce revenues by more than $2.9 trillion over 10 years, relative to this “current- law” baseline.
- Second, the tax plan in the Roadmap is notably different than the Thompson plan both in the breadth of the policies suggested as well as the composition of total revenues envisioned under such policies.
- It is true that the Thompson plan shares some similarities with the Roadmap’s individual tax changes (i.e. both offer a flatter, two-rate, Simplified Tax individuals can choose), but there are substantial differences as well. The Roadmap repeals the health care exclusion, replacing it with a capped refundable credit that grows with a blend of general and medical inflation. And on the business side, the Thompson plan retained the corporate income tax, lowering the rate from 35 percent to 27 percent. In contrast, the Roadmap would replace the corporate income tax with a very broad-based business consumption tax of 8.5 percent. Therefore, any analysis of the Roadmap that focuses on the potential shortfalls in revenue on the individual side would need to also account for the substantial changes elsewhere in the plan. As noted above, the overall tax policies in the Roadmap (the combination of individual and business taxes) are designed to raise yearly revenue amounts on par with the historical average in the U.S. (between 18 and 19 percent of GDP).