Tax Analysts Blog

Waste, Fraud, and Abuse on the Senate Floor

Posted on Nov 27, 2017

History will be made this week on the Senate floor as well as in the opulent cloakrooms adjacent to it, where cameras are not allowed. More than likely it will be in these spaces – no larger than a high school basketball arena and the adjacent locker rooms -- where the upper chamber of the U.S. Congress will draft and then pass the most significant piece of tax legislation in 31 years. Fortunately, for the Republicans who are rushing at breakneck speed to get this highly partisan, unpopular, and complex 515-page bill through the congressional sausage factory, an epidemic of sexual harassment revelations dominates the news and is keeping public scrutiny of this bill to a minimum.

What’s this about waste? At Congress's request and at taxpayers’ expense, the esteemed professional staff at the nonpartisan Joint Committee on Taxation have spent millions of dollars and thousands of hours building state-of-the-art models to study the macroeconomic impacts of changes in tax laws. Then Congress enacted new rules requiring the JCT to produce dynamic estimates for “major” legislation. Well, it doesn’t get any more major than this.

But Republicans are not anxious for that JCT study to become public and are taking advantage of a loophole in their own rule to suppress release of the JCT dynamic scores. As the Congressional Budget Office revealed yesterday, it is “not practicable” for the JCT to perform dynamic estimates in a timely manner. If “not practicable,” the dynamic scoring requirement can be waved.

So why do leaders force votes without waiting for this critical information? This is not a detail. The bill is being marketed as unleashing massive job creation with little or no effect on our already skyrocketing deficits. It would be nice for taxpayers to see these results before the vote. After all, we are paying for them.

Wait, what’s  this about fraud? Based on a review of prior JCT dynamic estimates, there is good reason to expect that the estimate of current legislation will show less-than-flattering growth effects. In the short run, stimulus effects are likely to be minimal because the economy is already near full employment and the tax cuts are strongly tilted away from low-income households that would spend more than their well-off brethren. In addition, supply-side effects from lower marginal rates will be small because statutory rate cuts are small (or in some cases nonexistent). Moreover, these cuts are partially and sometimes more than fully offset by the loss of deductibility of state and local income taxes. In the long run, capital stock and productivity increases will be held in check because the most powerful incentive for investment in the bill—100 percent expensing—expires after five years and because a deficit-induced increase in interest rates will result in a crowding out of private investment.

Instead of allowing reasoned analysis to see the light of day, Republicans undoubtedly will stay true to script that their beliefs trump careful economic analysis. Here is a small sample of their public justification for a $1.5 trillion tax cut in the face of our unsustainable fiscal finances:

 

"We believe that we'll get faster economic growth. We don't anticipate a big deficit effect from this tax reform.”

– Rep. Mark Meadows, R-N.C., Oct 30

“We believe that we’re going to be fine on that. We believe that when you look at other analysis, whether it’s going to be Treasury or the rest, that we’re right there in the sweet spot, with economic growth that gives us more revenue with where we need to be.”

 -House Speaker Paul D. Ryan, R-Wis., Nov. 7

“We believe we're going to get more than enough growth to pay for this.”

- Gary Cohn, White House economic adviser, Nov. 12

“We believe this is a responsible budget and a responsible tax reform.”

-Senate Majority Leader, Mitch McConnell, R-Ky., Nov. 12

“We believe with ... a small, modest amount of economic growth, that [deficit hike] gets completely wiped out. All you have to do is get four tenths of 1 percent of additional GDP."

- Sen. John Thune, R-S.D., Nov. 26

 

By the way, when you do the math, that statement by Thune implies that a $1.5 trillion tax cut will generate a modest $4.5 trillion of extra GDP. Excuse me if I don’t believe it! These comments are outside the economic mainstream. And they are likely to be contradicted by the JCT estimates – if they were allowed to see the light of day.

What’s this about abuse? After all, Republicans are not necessarily breaking any rules by moving quickly on a tax bill. But it is an abuse of power when the rapid movement is clearly intended to blur the public’s view. It is an abuse of power when there is no pressing need for reckless speed. Is there some national emergency that the tax cuts will solve that justifies not waiting a few extra weeks for the official analysis of the bill’s effects on employment and on deficits?

When Republicans are pressed on this point, they invariably respond that the general topics that are part of this reform have been studied and subject to hearings for years. That’s true. But unlike in 1986, most of the specific provisions of the legislation under consideration have received no hearings. Indeed, most experts, as you read this, are still struggling to understand dozens of billion-dollar “details” in this bill. Members who are voting on it have only a superficial understanding of it. Surely none of them have read the bill. 

There is no reasoned justification for rushing this bill at unprecedented speed through the process. Republicans are doing it because they have the power—and that’s that.

Because of the necessarily sloppy drafting of this legislation, if it becomes law Treasury will be writing regulations and Congress will be enacting technical corrections for years. There are more ticking time bombs in this bill than in a Road Runner cartoon (beep, beep). 

All kidding aside, uncertainty and complexity will cast a long shadow over business decisions.

 

 

Read Comments (10)

Edmund DantesNov 27, 2017

Pardon my skepticism on the quality of the JCT's million-dollar economic models. Their track record leaves a lot to be desired, to be diplomatic about it. Their projections are always wildly wrong, but there are never any consequences, we continue to pretend that they are the holy oracle whose judgment is infallible. It amounts to an outsourcing of Congressional judgment, and it should stop.

Tell me, can we back test these fancy models? Would they project that revenue from capital gains taxes would go up by 50% from 1980 to 1983, as a result of the lower of a lower tax rate? Or would they still project a revenue loss, as they did at the time?

Your complaint that the members will not have read the tax bill is pretty funny coming after Nancy Pelosi's demand that Congress had to pass Obamacare to find out what was in it. The rules have changed. You know as well as I do that no bill is ever read by more than 5% of members of Congress, they are relying upon staff summaries.

Bennett MintonNov 27, 2017

Mr. Dantes is right to be skeptical of the JCT's "dynamic" scoring analysis. The JCT long held that these analyses were, in layman's language, unstable and arbitrary because the broad effects "supply-side" advocates claim are not measurable. But Republicans insisted the staff develop an approach anyway on the theory that it would bolster their contention that tax cuts pay for themselves. As Mr. Sullivan implies, past dynamic analyses have found minimal advantage for the GOP's claims. Thus it makes no sense for the tax bill's authors to wait around for a bit of PR -- it won't help them. The hurry is to pass a bill that any taxpayer can tell with a 10-minute examination benefits the GOP's donor class and harms the economy, before said taxpayers focus, distracted as they are, by the scandal du jour.

Calvin H. JohnsonNov 27, 2017

CBO needs to assume zero added growth from capital incentives in Tax Cut bill. This bill gives $2.2 trillion over a decade as incentives to capital, offset mostly by repealing itemized deduction to bring down to $1.4 trillion net revenue loss . But there is already a glut of capital. The return rates from risk free interest are zero and below.[1] The market is saying they can't find any positive uses for capital.
The bill will make things worse. The bill is intended to create an wave of capital inflows coming from our trading partners and rivals. It gives negative taxes by allowing expensing of inputs but cap gain (or basis step up no tax) on outputs and also by allowing interest deduction. The two negative tax subsidies will drive returns on capital deeper into the negative.
Expect no growth from investments in negative- return investments, which is the equilibrium.
Calvin H. Johnson, Expect No Growth from Incentives to Already Over-supplied Capital

Aleksandr Serge...Nov 27, 2017

Look up who the real Edmund Dantes was. That moniker gives the writer (or bot?) away.

AnarchitekNov 27, 2017

Edmund Dantes indulges in a favorite republikan fantasy, appropriating the fictional identity of a character who lives the ultimate Greedy Old Prix pipedream: finding a cache of stolen loot to steal from the original thieves, leading to the misappehension that this somehow imparts fiscal wisdom to the "lucky" thief. The only thing one learns from stealing is to never trust anyone. Dantes, of course, is the original identity if the mysterious, and unspeakably wealthy, Count of Monte Cristo, from Alexandre Dumas' immortal novel, whose obsession is vengeance.

However, the tea-billie returduKKKan't tax "plan" (if ever a notion deserved quotes, this one does) more closely resembles the Titajic, esoecially the "whistling past the graveyard" hype that preceded the overblown ocean liner's only voyage.

Comments touted these "assets", meant to "prove" its invincibility:

Titanic was "designed to be unsinkable", according to a White Star Line publicity brochure produced in 1910.

The immense ocean liner used 70,000 tons of "good Italian steel".

Titanic was designed to incorporate sixteen watertight compartments, with doors designed to close automatically if the water level rose above a certain height. The doors could also be electronically closed from the bridge. Titanic was supposed to be able to stay afloat, even if any two compartments or the first four became flooded.

Titanic had only 20 lifeboats, to accommodate 1,178 people, but there were approximately 2,224 on board. The liner had a maximum capacity of 3,327 souls. No lifeboat drills were conducted, after the ship set sail; one was planned, but canceled, so the Capt could enjoy one last Sunday service before retirement. The lack of drills resulted in chaos and underutilization of the orecious resource, at the exact instant of its most critical need.

Even as the "unsinkable" Titanic was beginning its long rest at the bottom of the Atlantic, White Star Line Vice President P.A.S. Franklin announced ” We place absolute confidence in the Titanic. We believe the boat is unsinkable.”

It wasn't the first time someone opened wide, only to swallow their foot, and the comments of Mssrs McConnell, Ryan, and the other frantic pseudo-Mandrake-the-Magicians won't be the last, their bobbing-head-portrayals notwithstanding.

Saying something will work is not the same as that something actually performing, as history has ably demonstrated. The RayGun-Bush1-Bush2 tax cuts have only made the rich richer, and precious little else. Another one won't accomplish any more, but will definitely do far worse damage.

No one is forcing the already-too-rich wealthy to TAKE all that money. If they don't care to pay taxes on the income, they should just stop trying to swell their Forbes 400 status. After all, that's ALL this is REALLY about. In the meantime, millions suffer, because a few schmucks' dicks are so tiny, they have to prove their virility, by hoovering up every penny, on every deal.

Don't try to prettify it, don't make excuses for them, in futile hopes you, too, can one day join their exalted ranks. They're playing Monopoly for keeps, and everyone knows, there is only ONE winner in that game. It's a zero-sum game for suckers, and the sooner we quit playing, the better for us.

Taxes are not a burden, they are shared costs of maintaining civilization, each paying as they are able. The idea that taxes and government are somehow "bad", are old John Birch Society complaints, remnants of a debunked litany of bunkum, hot air and patent hooey.

That returdiKKKan'ts resurrected such utter nonsense isn't surprising, since they are long on rhetoric, and short on ideas. In fact, the last republican to have anything that approximated "good ideas" was Ike. Before him, one has to go all the way back to Teddy. The rest have preached varying sermons on "trickle-down" fantasies concocted to lull new converts to "greed is good" posturing.

Edmund DantesNov 28, 2017

Yikes! Engagement on the Tax Notes blog? This is an unusual day.

Mr. Serge, Edmund Dantes is fictional, not "real," and I am not a bot. Anarkitect, Edmund was not a thief. He believed and acted upon the words of a dying man, a man who had been dismissed as crazy by everyone else. He found a lost treasure, he did not steal anything. Edmund sought justice, not vengeance. He laid traps for his enemies, knowing their weaknesses, and they walked into those traps, to their sorrow. It's a great book.

In any event, my unanswered point is this: The JCT's record of prediction is not very good. For an extreme example, the JCT failed to foresee that revenue from capital gains taxes would zoom from $12 billion in 1980, before the tax rate cut, to $80 billion by 1986, during the period the rate cut was in effect. They failed to recognize that lowering the taxes on stock gains would dramatically increase the demand for publicly traded stocks. The severe failure of the JCT's projection in this instance was one key reason for the Republicans' demand for dynamic scoring. I do not fault the JCT for an inability to forecast the effect of the rate cut on stock prices, because no one else predicted it either. In fact, I believe the task is impossible. But in hindsight, they should have at least gotten the direction correct, and scored it as a revenue raiser and not a loser. Similarly, they should have scored the luxury tax on boats as a revenue loser (which it decidedly was) and not a gainer.

Mike55 has commented to other blog posts that no one does these predictions better than the JCT, however imperfect they are, and I can agree. He made the valid point that some kind of anchor of predicted effects is needed for tax legislation, and I agree with that as well. But what I really don't like is seeing the Congress twisting itself into knots to try to meet the "score" that the JCT has come up with. The JCT comes up with a best guess, but it is only an educated guess. We know the guess is wrong, we just don't know how wrong and in which direction it will turn out to be. Congress needs to take that guess into account and then exercise political judgment. They should not be making some tax provisions expire at future dates so as to meet the budget guesses. Legislating is an art, not a science, however much some would like to believe the contrary.

We are asking the JCT to do the impossible, and then treating their report as if they have succeeded. This does not lead to the best tax legislation. Returning to the blog post theme, the failure to treat JCT scores as gospel, or the failure to wait for a "dynamic" score (guesses upon guesses) is not fraud, waste or abuse. It is entirely reasonable.

Edmund DantesNov 28, 2017

I am deeply saddened to learn of the untimely death of Chris Bergin. His leadership of Tax Analysts was of inestimable value, and TA itself has made an extraordinary contribution to the advancement of sound taxation in the USA. Thank you for posting the notice.

I especially enjoyed Mr. Bergin's blog contributions. Always witty, learned and insightful, and on occasion he would banter with his commenters. I hope you keep those posts in the permanent archive.

I have missed Mr. Bergin since he stopped blogging, and now I learn I will miss him forever. My best to his family.

James Gust

Mike55Nov 29, 2017

In response to Martin's original blog post: there's a lot of good stuff here. I agree that we need to see those dynamic scores (Edmund summarizes my position on this well), and sooner rather than later. I also agree those dynamic scores are likely to disappoint... dynamic growth was, at best, the 3rd priority in this reform effort.

I also think you're appropriately critical of Republican growth rhetoric, though perhaps for the wrong reasons. In the grand scheme of things this is a tame/small tax cut. The Republicans are essentially bragging their grand tax reform effort will not increase the deficit, because it's far too small/tame to outweigh a rounding error in baseline projected GDP growth. While 100% accurate, that's a weak message! So the quotes you've identified are not misleading, but are instead just... well... sorta lame.

Mike55Dec 1, 2017

Well, now have the dynamic scores, and it appears I was wrong about (at least) one thing: the JCT predicts $400B in dynamic growth. That's a lot better than I'd expected!

Edmund DantesNov 30, 2017

Well put, Mike 55. TCJA is pretty weak tea compared to prior tax legislation. Republicans who hope for an ERTA-like boom from this tax bill are destined for disappointment.

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