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.
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.
The JCT report indicates that:
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.
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.
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.