Macroeconomic estimate of Senate Finance “extenders” bill

Senate Finance “extenders” bill

The Joint Committee on Taxation (JCT) on August 4, 2015, issued a report (JCX-107-15) of the macroeconomic effects of S. 1946, the Tax Relief Extension Act of 2015, approved by the Senate Finance Committee (SFC) on July 21, 2015.

Related content

Read more on the SFC bill in TaxNewsFlash-United States. Read a Summary of Extenders in Committee Reported Bill released today by the SFC.

JCT estimates

The JCT report includes a table that shows that, without taking into account macroeconomic effects, the temporary extension of the expired provisions is estimated to decrease revenues to the federal government by approximately $96.945 billion over the 10-year budget period. However, the table also shows that the temporary extension is estimated to result in approximately $10.386 billion of additional revenues due to the bill’s positive macroeconomic effects. Thus, taking into account the macroeconomic impact, the JCT estimates that the bill would, on a net basis, decrease revenues by approximately $86.558 billion over the period.

The JCT used its Macroeconomic Equilibrium Growth (MEG) model to simulate the macroeconomic effects of the bill.

JCT analysis

The JCT report indicates that:

  • The provisions in the bill affecting businesses, especially the extension of bonus depreciation, are expected to have a significant, but temporary, impact on the after-tax cost of capital.
  • The primary effect of the bill on the economy is expected to be an initial increase in the stock of business capital of about 0.3% in the first half of the 10-year budget period, resulting in increased production, output, and receipts by about 0.1% during that period.
  • The growth generated by this initial increase in capital stock is projected to increase revenues by about $17.2 billion over the budget period relative to present law.
  • But, interest rates can be expected to increase due to the growth in federal debt resulting from the extension of the provisions.
  • And, after the extended provisions expire, the growth of capital is expected to decrease gradually, reversing the economic effects described above and diminishing the revenue feedback effect.
  • The gradual decline in investment in the later part of the budget period is caused primarily by the expiration of the temporarily extended tax provisions, but the increase in the deficit on costs of private sector borrowing also has an impact.
  • In the second and third decade after enactment of the bill, private borrowing would be expected to be more expensive (because of the increase in federal debt), slightly lowering capital stock and reducing economic growth and associated revenues relative to present law. However, because the expected increase in debt would be small relative to the overall size of the economy, the long run effect would be expected to be small.

Macroeconomic scoring, in general

As a general matter, macroeconomic scoring takes into account the budgetary effects of legislative changes on economic output, employment, and capital stock. Under the Budget Resolution passed by Congress earlier this year, in the case of “major” tax legislation, the JCT and the Congressional Budget Office (CBO) are required “to the extent practicable” to produce a point estimate of the revenue effect that takes into account macroeconomic changes. This estimate is the official estimate of the budgetary effects of such legislation for the House, but is used for informational purposes only for the Senate. The Budget Resolution does not specify what kinds of models and assumptions the JCT must use in producing its macroeconomic estimate.

The chairs of the budget committees in both the House and the Senate also have broad flexibility to require JCT to produce budgetary estimates of any tax legislation to take into account macroeconomic feedback.

KPMG observation

While the JCT might use different models, assumptions, and methodologies in future macroeconomic estimates, the fact that it used the MEG model in this situation at least provides some insight as to how the JCT is approaching producing macroeconomic point estimates. The JCT also used the MEG model in its June estimate of the budgetary impact of repealing the tax provisions of the Affordable Care Act. Read the CBO report on the Budgetary and Economic Effects of Repealing the Affordable Care Act (which includes JCT’s estimate and other JCT input).

Note that, when Rep. Dave Camp released his tax reform proposal last year, the House rules did not provide for a macroeconomic point estimate to be used as the official score of the budgetary effects of legislation. However, Rep. Camp requested an alternate, non-official, estimate that considered the proposal’s macroeconomic effects on revenues.

At that time, the JCT analyzed Rep. Camp’s proposal using different models that employed different assumptions about the deficit, monetary and fiscal policies, sensitivities of individual labor and savings choices and business decisions to changes in tax law, and other matters. The MEG model the JCT used at that time resulted in a lower estimate of the positive macroeconomic effects of the proposal than did another one of the models used.

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