Reforming the Federal Tax Policy Process

December 17, 2002 • Policy Analysis No. 463
By David R. Burton

When government considers raising or cutting taxes, official scorekeepers estimate changes to federal revenues and the distribution of the tax burden. Those estimates are very important in policy discussions regarding the desirability of proposed tax changes. Therefore, it is crucial that policymakers receive the most accurate and complete assessment of the likely effects of tax proposals.

Unfortunately, policymakers are currently provided with biased and incomplete information. Estimated effects on revenue of proposed tax changes do not take into account most of the economic effects of proposals. In addition, the tax policy process, which is centered in the congressional Joint Committee on Taxation and the Treasury Office of Tax Analysis, is resistant to change and closed to public scrutiny and peer review.

This report proposes seven reforms to increase the accuracy of tax revenue and distribution estimates, three reforms to improve the transparency of the process, and three reforms to restructure federal tax policy organizations to increase accountability.

To improve the accuracy of tax estimates, the JCT and OTA should produce “dynamic” revenue estimates, in addition to the current “static” estimates, which ignore the real world economic effects of tax changes and can generate extremely inaccurate results.

The accuracy of “distributional” analyses, which show the effects of tax changes by income group, can also be improved. Analyses should be presented for longer horizons and should present results by both consumption and income levels. In addition, distributional analyses should utilize alternate incidence assumptions when expert opinions differ.

Accuracy can also be improved by basing “tax expenditure” estimates on a consistent income base rather than the arbitrary measure currently used. Estimated compliance costs of proposed tax legislation should also be provided to policymakers.

To improve the transparency of the tax policy process, the models and methodology used by the JCT and OTA should be publicly disclosed, and data should be generally available to independent researchers.

To help implement the proposed changes, federal tax policy organizations must be overhauled and new tax boards created.

About the Author
David R. Burton