Tax Analysts Blog

Hey, Chairman Brady, What’s the Score?

Posted on Oct 27, 2017

Tax Analysts reports that Ways and Means Committee Chair Kevin Brady will release a description and statutory text of his long-awaited tax plan on November 1. Markup will begin on November 6. No matter how smart you are, five days doesn’t provide a lot of time to evaluate an extremely complex piece of legislation. For example, proposed changes in international tax law will be larger than the monumental overhaul of those rules in 1962. In addition to dozens (perhaps hundreds, no exaggeration) of critical issues for various industries and constituencies, the legislation is expected to lay out new, unprecedented, and complex rules for separating deductible from nondeductible interest and for separating passthrough income eligible for a special 25 percent rate and passthrough income subject to ordinary rates (which may or may not be as high as 39.6 percent).

But anybody who has been in the sausage factory where Congress makes tax policy knows, revenue estimates are all-important. When the rubber hits the road in tax policy—that is, when committees actually mark up legislation—nobody in the room is looking at the statutory language or even the official explanation. No, everybody has a dog-eared, coffee-stained copy of the Joint Committee on Taxation’s revenue estimates in front of them.

So here’s the rub: Based on statements from Brady himself, my colleagues Stephen K. Cooper and David van den Berg report that “the Joint Committee on Taxation will provide a revenue score for the legislation as the markup begins, while a dynamic score will be completed after the committee approves the bill.” Say what?

So literally there will be advance disclosure. But last-minute disclosure of complex documents is just a subtle variation of nondisclosure. It is impossible for committee members—who after all are responsible for the federal government’s “ways and means”-- to evaluate proposals if they don’t have time to digest the revenue effects. Brady’s proposed timeline is like car shopping without knowing the price until you’re about to sign on the dotted line. It’s like learning the price of your plane ticket after you arrive at the airport. 

The JCT’s reputation for political neutrality and professionalism is absolutely unquestioned. That professional staff would never even consider—nor would anybody who knows anything ever try to effect—modification of an estimate for political purposes. But the chair to a considerable degree can control the flow of the unbiased information that the staff provides. In this case, the revenue estimates will not be made public until the last minute. 

But wait, there’s more. Public disclosure of two other critically important sets of estimates from the JCT is up in the air. First, there are the newly required dynamic estimates.  As Cooper and van den Berg report, these will not available until after the markup. But how long that will take is unknown. Here we cannot entirely fault Brady about timing. Dynamic estimates are enormously difficult and take a lot more time to cook than a Thanksgiving turkey. The delay demonstrates how cumbersome dynamic estimation is—not just in terms of economic analysis, but also in terms of legislative process.

If in committee or on the Senate floor an amendment is adopted that allegedly will have a significant effect on economic growth—for example, a large change in depreciation schedules or corporate tax rates—the dynamic effect cannot be known even if the JCT is given a lot of lead time, because dynamic estimates must consider the entire structure of a bill. To take the simplest example, the economic effect of disallowing interest deductions will vary depending on the tax rates. If those rates have been amended in committee or on the Senate floor since the JCT made its estimates, the estimates are no longer valid.

The second set of estimates that should be released well before the markup is the official tax burden distribution table from the JCT. This is not a detail. It will be the most cited document in the great debate we will have on whether this is a tax cut that favors the middle class or the wealthy.  So far I have seen no reporting on when this bombshell will be released.

In between the bill’s release (November 1) and the public provision of estimates (November 6), public interest groups with tax models (like the Tax Foundation and the Urban-Brookings Tax Policy Center) will rush to publish their own estimates. These unofficial estimates undoubtedly will be stamped as preliminary and understandably may be less than fully checked for accuracy because of how rapidly they will be undertaken. But forget the caveats and yellow warning lights—these estimates will be compressed into sound bites that will get enormous press coverage for which the public and members themselves will have an enormous appetite.  This will only add to the information anarchy we can expect that week.

Mr. Brady, rushing this historic tax bill is bad enough. But not allowing the timely release of critical information so that we the people—not to mention members of your committee--can thoughtfully consider the deal is no way for your prestigious committee to make major changes in law that will affect hundreds of millions of Americans. It is the opposite of transparency. We need revenue estimates, both static and dynamic, and distribution tables. We need them in order to see how the puzzle pieces fit (or perhaps don’t fit) into the $1.5 trillion framework set out in the budget resolution. We need them to see how close it comes to providing the “middle-class miracle” trumpeted by the president.

If the JCT cannot supply them in a timely manner because you are still negotiating changes at the last minute, then for the sake of making good and stable tax law it would be reasonable for you to consider delay of your markup. Because everybody understands that current political conditions make this unthinkable, the only other honorable option is to release a preliminary markup that would be a reasonably close approximation of your final negotiated proposal and let the JCT provide estimates of that bill to the public in a timely manner. After all, you as well as any other member can propose amendments to the initial markup. 

 

 

 

Read Comments (3)

Jennifer FitzpatrickOct 27, 2017

Another trenchant analysis. What is Chairman Brady so afraid that we will see that he must rush through this bill with its potentially massive impact on our economy? Changes of this magnitude require an open, transparent process with careful, thoughtful deliberation and discussion. Not this attempt to ram through a deal with information only available at the last minute.

Edmund DantesOct 30, 2017

On the one hand, I agree wholeheartedly that the Republicans have done a terrible job of managing this tax reform, and I cannot understand why they let it slide to the last minute. Very, very disappointing. They should have followed the ERTA timeline. This should have been finished before August--it can be done.

But on the other hand, I can't agree that "The JCT’s reputation for political neutrality and professionalism is absolutely unquestioned." I am happy to question it. JCT provides, at best, educated guesses that have a very poor record for their accuracy. I believe that the JCT estimates should be treated as evidence, not gospel.

To take an undisputed example, JCT projected large tax revenues from the luxury tax on yachts a couple decades ago. JCT did not predict that the luxury tax would destroy the American boat-building industry. But that's what happened, boat building disappeared, very little tax was collected. When this became obvious, the luxury tax was repealed, but the damage to the industry was not reversible.

JCT's record or prognostication on Obamacare was also lamentable. Very often I have seen line items in a JCT estimate that just don't make sense to me, if you try to unpack how they were derived.

I would like someone to do a a rigorous check on the margin of error of past JCT projections of tax revenues. My impression is that they always overestimate the revenue cost of cutting the capital gains tax, and they also overestimate the revenue gains from tax measures narrowly targeted to "the rich." Because the rich have the means to change their economic behavior, and they have always done so. Hence the need for dynamic scoring, which is really just another layer of guesswork.

Who does it better than the JCT? No one, so far as I know, because it is an inherently impossible job. Which is why the JCT's work should be given some respect as educated opinion, but it should not be treated as infallible, as Congress does today.

Will this tax reform favor the rich? Of course it will, it has to, because the top 20% of taxpayers already pay 95% of the income taxes. We've pounded the drum of "middle class tax cut" so hard for so long much of the middle class only pays FICA now.

As much as I hope for corporate tax reform, the Republicans better not touch 401(k) plans to "pay for" it.

Mike55Oct 31, 2017

I think Brady is doing what the political climate demands. The "honorable thing" no longer works, a lesson Brady learned watching the Camp/Baucus reform efforts implode from the front row. All he'd accomplish by releasing details earlier than required would be provide Democrats more time/material to try and scuttle tax reform. What does that achieve?

If anyone can name 5+ Democrats on W&M who would review the preliminary markup with an open mind, then offer constructive feedback intended to improve the bill rather than just obstruct it, please list them here and I'll change my opinion. Personally I think such a list would at most have 1 or 2 names (e.g., Thompson),* and that's being very generous as most W&M Democrats have already publicly denounced the bill. Sorta hard to see them saying "I know that yesterday I called this called this 'a giveaway to the Republican donor class that will bankrupt our children's future,' but ya know, now that I've read it, it's actually a really promising start!"

*This isn't meant to be critical of the W&M democrats who, like Brady, are simply behaving in the manner the current political climate demands.

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