Reforming the Federal Tax Policy Process

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When government considers raising or cuttingtaxes, official scorekeepers estimate changes to federalrevenues and the distribution of the tax burden.Those estimates are very important in policydiscussions regarding the desirability of proposedtax changes. Therefore, it is crucial that policymakersreceive the most accurate and complete assessmentof the likely effects of tax proposals.

Unfortunately, policymakers are currently providedwith biased and incomplete information.Estimated effects on revenue of proposed taxchanges do not take into account most of the economiceffects of proposals. In addition, the tax policyprocess, which is centered in the congressionalJoint Committee on Taxation and the TreasuryOffice of Tax Analysis, is resistant to change andclosed to public scrutiny and peer review.

This report proposes seven reforms toincrease the accuracy of tax revenue and distributionestimates, three reforms to improve thetransparency of the process, and three reforms torestructure federal tax policy organizations toincrease accountability.

To improve the accuracy of tax estimates, theJCT and OTA should produce "dynamic" revenueestimates, in addition to the current "static"estimates, which ignore the real world economiceffects of tax changes and can generateextremely inaccurate results.

The accuracy of "distributional" analyses,which show the effects of tax changes by incomegroup, can also be improved. Analyses should bepresented for longer horizons and should presentresults by both consumption and incomelevels. In addition, distributional analyses shouldutilize alternate incidence assumptions whenexpert opinions differ.

Accuracy can also be improved by basing "taxexpenditure" estimates on a consistent income baserather than the arbitrary measure currently used.Estimated compliance costs of proposed tax legislationshould also be provided to policymakers.

To improve the transparency of the tax policyprocess, the models and methodology used bythe JCT and OTA should be publicly disclosed,and data should be generally available to independentresearchers.

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

David R. Burton

David R. Burton is a principal in the Argus Group, a Virginia law and government relations firm.