Tag: cbo

CBO Dynamically Scores Immigration Bill

The Congressional Budget Office has fiscally scored the Senate’s immigration bill, S. 744, and found that it will decrease fiscal deficits over the next 20 years—giving a huge boost to reform proponents.  In line with criticisms made by me and others, the CBO departed from orthodoxy and assumed that S. 744 would affect economic growth (i.e., they dynamically scored the bill)—arguing that the economic and fiscal gains from immigration reform are clear.  These findings are broadly consistent with Cato’s findings here.  

The CBO produced two scores of S. 744.  The first was less dynamic, assuming that GDP and the workforce would grow as a result of immigration. Increased numbers of workers will add to GDP, producing growth by definition, and not displacing many other workers.  The second score is more dynamic, taking into account many of the economic effects of immigration reform using an enhanced Solow model.

The less-dynamic CBO score found that immigration reform will reduce the federal deficit by about $197 billion by increased GDP and tax revenues through adding six million people to the workforce by 2023.  Over a period of 20 years, the CBO estimated that this legislation would reduce deficits by about $700 billion—a sizeable decrease.  In what seems to be a specific dig at the 50-year span of the recent Heritage study, the CBO wrote that, “we cannot determine whether enactment of S. 744 would lead to an increase in on-budget deficits … in any of the three 10-year periods starting in 2033.” 

The more dynamic CBO score found that S. 744 would not affect the budget by 2023.  However, because the dynamic economic effects of S. 744 would affect the economy slowly, the CBO predicts a $300 billion decrease in deficits from 2023-2033 greater that the $700 billion reported in the less-dynamic score.

The more-dynamic CBO model predicts $1.197 trillion in reduced deficits over the next 20 years if immigration reform is passed. 

Delving into the details of the CBO’s more-dynamic score, they estimated that S. 744 would increase GDP by 3.3 percent in 2023 and 5.4 percent in 2033, relative to the baseline.  Per capita GNP would lower by .7 percent by 2023 but be higher by .2 percent in 2033.  Wages would be .5 percent higher in 2033 under S. 744. 

The more-dynamic score takes into account these effects from S. 744: 

  1. Increased size and employment in the economy.
  2. Increased average wages after 2025.
  3. Slightly increased unemployment rate through 2020.
  4. Increased quantity of capital investment.
  5. Increased productivity of labor (due to complementary task specialization).
  6. Increased productivity of capital (due to increase in supply of labor and TFP).
  7. Higher interest rates.

The CBO took account of some of the main findings in the economic literature about the economic effects of immigration.  For example, the CBO predicts there will be a 12 percent increase in the wages of legalized immigrants.

Conceptually, dynamically scoring legislation is a big step toward rationally judging the costs and benefits of policy changes.  Legislation that changes the size of the economy or the pace of economic growth will affect future tax revenues that will, in turn, affect the fiscal state of the federal government.  CBO scores have been inaccurate over time—many wildly so.  They should never be the final word on the estimated net fiscal costs of immigration reform, but this is the most thorough examination to date. The CBO’s findings broadly confirm Cato’s research that immigration reform will be economically beneficial to immigrants and the country as a whole. 

Food Stamps and the House Farm Bill

Debate on the House Agriculture Committee’s version of the next farm bill will begin in the Republican-controlled chamber in June. One of the most contentious issues will be spending on the Supplemental Nutrition Assistance Program (SNAP, a.k.a, food stamps). The House Ag bill would cut SNAP spending by $20.5 billion over 10 years versus the Congressional Budget Office’s baseline. That’s too much for Democrats and it might be too little for conservative Republicans. 

Earlier in the week I wrote that the federal government should not administer or fund anti-poverty programs. Unfortunately, both Republicans and Democrats support big government so that isn’t an option. So let’s put the proposed cuts in food stamps in perspective.

The first chart shows the dramatic increase in inflation-adjusted SNAP spending since 2000. (See here for a quick background on what caused SNAP spending to more than triple since 2000).


The second chart shows the projected amount of spending under the House Ag bill versus the CBO’s baseline. Sum up the difference and you get the $20.5 billion over 10 years in cuts. On an annualized basis, it becomes clear that we’re hardly talking about major cuts to the food stamps program. Moreover, as the first chart shows, spending would remain near the elevated levels of recent years.


CBO’s Tax Expenditure Report Uses Wrong Benchmark, Overstates Loopholes

As a long-time advocate of tax reform, I’m not a fan of distortionary loopholes in the tax code. Ideally, we would junk the 74,000-page internal revenue code and replace it with a simple and fair flat tax - meaning one low rate, no double taxation, and no favoritism.*

The right kind of tax reform would generate more growth and also reduce corruption in Washington. Politicians no longer would have the ability to create special tax breaks for well-connected contributors.

But we won’t get to the right destination if we have the wrong map, and this is why a new report about “tax expenditures” from the Congressional Budget Office is so disappointing.

As you can see from this excerpted table, CBO makes the same mistake as the Tax Policy Center and assumes that there should be double taxation of income that is saved and invested. As such, they list IRAs and 401(k)s as tax expenditures, even though those provisions merely enable people to avoid being double-taxed.

Likewise, the CBO report assumes that there should be double taxation of dividends and capital gains, so provisions to guard against such destructive policies also are listed as tax expenditures.

CBO Tax Expenditure List

For the Sake of Intellectual Integrity, Republicans Should Not Cite the CBO When Arguing against Obama’s Proposed Fiscal-Cliff Tax Hike

I’ve commented before how the fiscal fight in Europe is a no-win contest between advocates of Keynesian deficit spending (the so-called “growth” camp, if you can believe that) and proponents of higher taxes (the “austerity” camp, which almost never seems to mean spending restraint).

That’s a left-vs-left battle, which makes me think it would be a good idea if they fought each other to the point of exhaustion, thus enabling forward movement on a pro-growth agenda of tax reform and reductions in the burden of government spending.

That’s a nice thought, but it probably won’t happen in Europe since almost all politicians in places such as Germany and France are statists. And it might never happen in the United States if lawmakers pay attention to the ideologically biased work of the Congressional Budget Office (CBO).

CBO already has demonstrated that it’s willing to take both sides of this left-v-left fight, and the bureaucrats just doubled down on that biased view in a new report on the fiscal cliff.

For all intents and purposes, the CBO has a slavish devotion to Keynesian theory in the short run, which means more spending supposedly is good for growth. But CBO also believes that higher taxes improve growth in the long run by ostensibly leading to lower deficits. Here’s what it says will happen if automatic budget cuts are cancelled.

Eliminating the automatic enforcement procedures established by the Budget Control Act of 2011 that are scheduled to reduce both discretionary and mandatory spending starting in January and maintaining Medicare’s payment rates for physicians’ services at the current level would boost real GDP by about three-quarters of a percent by the end of 2013.

Not that we should be surprised by this silly conclusion. The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it was followed by record levels of unemployment.

But I think the short-run Keynesianism is not CBO’s biggest mistake. In the long-run, CBO wants us to believe that higher tax burdens translate into more growth. Check out this passage, which expresses CBO’s view the economy will be weaker 10 years from now if the tax burden is not increased.

…the agency has estimated the effect on output that would occur in 2022 under the alternative fiscal scenario, which incorporates the assumption that several of the policies are maintained indefinitely. CBO estimates that in 2022, on net, the policies included in the alternative fiscal scenario would reduce real GDP by 0.4 percent and real gross national product (GNP) by 1.7 percent. …the larger budget deficits and rapidly growing federal debt would hamper national saving and investment and thus reduce output and income.

In other words, CBO reflexively makes two bold assumption. First, it assumes higher tax rates generate more money. Second, the bureaucrats assume that politicians will use any new money for deficit reduction. Yeah, good luck with that.

To be fair, the CBO report does have occasional bits of accurate analysis. The authors acknowledge that both taxes and spending can create adverse incentives for productive behavior.

…increases in marginal tax rates on labor would tend to reduce the amount of labor supplied to the economy, whereas increases in revenues of a similar magnitude from broadening the tax base would probably have a smaller negative impact or even a positive impact on the supply of labor. Similarly, cutting government benefit payments would generally strengthen people’s incentive to work and save.

But these small concessions do not offset the deeply flawed analysis that dominates the report.

But that analysis shouldn’t be a surprise. The CBO has a track record of partisan and ideological work.

While I’m irritated about CBO’s bias (and the fact that it’s being financed with my tax dollars), that’s not what has me worked up. The reason for this post is to grouse and gripe about the fact that some people are citing this deeply flawed analysis to oppose Obama’s pursuit of class warfare tax policy.

Why would some Republican politicians and conservative commentators cite a publication that promotes higher spending in the short run and higher taxes in the long run? Well, because it also asserts - based on Keynesian analysis - that higher taxes will hurt the economy in the short run.

…extending the tax reductions originally enacted in 2001, 2003, and 2009 and extending all other expiring provisions, including those that expired at the end of 2011, except for the payroll tax cut—and indexing the alternative minimum tax (AMT) for inflation beginning in 2012 would boost real GDP by a little less than 1½ percent by the end of 2013.

At the risk of sounding like a doctrinaire purist, it is unethical to cite inaccurate analysis in support of a good policy.

Consider this example. If some academic published a study in favor of the flat tax and it later turned out that the data was deliberately or accidentally wrong, would it be right to cite that research when arguing for tax reform? I hope everyone would agree that the answer is no.

Yet that’s precisely what is happening when people cite CBO’s shoddy work to argue against tax increases.

It’s very much akin to the pro-defense Republicans who use Keynesian arguments about jobs when promoting a larger defense budget.

To make matters worse, it’s not as if opponents lack other arguments that are intellectually honest.

So why, then, would anybody sink to the depths necessary to cite the Congressional Budget Office?

CBO on Income and Tax Distribution

The Washington establishment loves talking about the “distribution” of income and taxes. The CBO has issued a new report on the topic that will no doubt keep the discussion rolling on.

That said, the CBO report has some interesting statistics to consider. Most important are calculations of average federal tax rates, which are total federal taxes paid as a share of income. The chart shows average tax rates by quintiles, which each contain one fifth of U.S. households grouped by income level. The households at the top are hit with the largest burdens by far. Elsewhere, I’ve discussed who some of these high-earning households are and the damage done by nailing them with such high taxes. (For example, see here and here).

A Weak Defense of an Illegal Fix to an ObamaCare Glitch

In this November 16 op-ed, Jonathan Adler and I explain how the Obama administration is trying to save ObamaCare (“the Affordable Care Act”) by creating tax credits and government outlays that Congress hasn’t authorized.  (The administration describes this “premium assistance” solely as tax credits.)  This week, the administration tried to reassure everybody that no, they’re not doing anything illegal.

Here’s how IRS commissioner Douglas H. Shulman responded to a letter from two dozen members of Congress (emphasis added):

The statute includes language that indicates that individuals are eligible for tax credits whether they are enrolled through a State-based Exchange or a Federally-facilitated Exchange. Additionally, neither the Congressional Budget Office score nor the Joint Committee on Taxation technical explanation of the Affordable Care Act discusses excluding those enrolled through a Federally-facilitated Exchange.

And here is how HHS tried to dismiss the issue (emphasis added):

The proposed regulations issued by the Treasury Department, and the related proposed regulations issued by the Department of Health and Human Services, are clear on this point and supported by the statute. Individuals enrolled in coverage through either a State-based Exchange or a Federally-facilitated Exchange may be eligible for tax credits. …Additionally, neither the Congressional Budget Office score nor the Joint Committee on Taxation technical explanation discussed limiting the credit to those enrolled through a State-based Exchange.

These statements show that the administration’s case is weak, and they know it.

When government agencies say that a statute indicates they are allowed to do X, or that their actions are supported by that statute, it’s a clear sign that the statute does not explicitly authorize them to do what they’re trying to do. If it did, they would say so. (A Treasury Department spokeswoman offers a similarly worded rationale.)

In our op-ed, Adler and I explain why the statutory language to which these agencies refer does not create the sort of ambiguity that might enable the IRS to get away with offering premium assistance in federal Exchanges anyway. (Nor does the fact that the CBO and the JCT misread portions of this 2,000-page law create such ambiguity.) That’s because there is no ambiguity in that language. There is only a desperate search for ambiguity because the law clearly says what supporters don’t want it to say.

Finally, the fact that these two statements are so similar shows that the administration considers this glitch to be a serious problem and wants everyone on the same page.

Washington & Lee University law professor Timothy Jost is an ObamaCare supporter and a leading expert on the law.  He is also too honest for government service, for he has acknowledged that ObamaCare “clearly” does not authorize premium assistance in federal Exchanges, and that it is only “arguabl[e]” that federal courts will let the administration get away with offering it. (Again, in our op-ed, Adler and I explain why that argument falls flat.)

After reading the administration’s statements, Adler writes, ”If that’s all they got, they should be worried.”