How Camp's Discussion Draft Would Impact the Economy
Along with its analysis of the conventional revenue impacts (summarized here by CRFB), the Joint Committee on Taxation (JCT) analyzed the potential economic impacts of Chairman Camp's proposal, also known as a macro-dynamic estimate. Overall, JCT expects that this bill would increase the size of the economy over the next decade by anywhere from 0.1 percent to 1.6 percent, largely caused by two things: reduced marginal tax rates on labor and the boost to consumption from increases in after-tax income. Those increases in real GDP translate to increases of roughly $200 billion to $3.4 trillion of additional economic activity through 2023.
Before we review the details of JCT's analysis, it's important to understand dynamic scoring and its role in the current budget process. Scoring agencies like JCT and CBO incorporate micro-dynamic changes from proposals in their conventional estimates -- covering changes in behavior, supply and demand, and the timing of certain decisions, to name a few. What the conventional scoring process does not do is incorporate the the effects of any changes in macroeconomic variables -- things like GDP, inflation, and employment -- and how those might alter the cost estimate. As CRFB discussed in 2012, dynamic scoring can offer valuable information that conventional estimates do not provide. However, dynamic scoring is extremely sensitive to the assumptions used, and there is no consensus on what some of those assumptions should be. Therefore, supplementing conventional estimates with some additional dynamic estimates on major pieces of legislation, such as Camp's tax reform draft, can help give lawmakers and the public more information, but the default score should be used for budgetary purposes.
In its estimates of the discussion draft, JCT shows that lower effective marginal tax rates improve work incentives and overall labor supply, and in some years would stimulate higher levels of business investment. The proposal would also increase the after-tax income of many individuals, which would in turn increase private demand, especially when the economy has not yet fully recovered. However, JCT also notes that the cumulative effect of other parts of the proposal would hold back the economy. Specifically, reductions or eliminations of some tax preferences -- like accelerated depreciation -- would increase effective marginal tax rates on business investment. On net, JCT expects that the after-tax return to investment would fall and multinational companies would likely see their tax liability increase. Yet JCT expects the overall economic impact to be positive because of the individual income tax provisions.
2014-2023 Economic Effect of the Tax Reform Act
||High Estimate||Average of All Estimates
|% Change in Real GDP||+0.1%||+1.6%||+0.65%|
|$ Change in Real GDP||+$0.2 trillion||+$3.4 trillion||+$1.4 trillion|
|% Change in Labor Supply||+0.3%||+1.5%||+0.6%|
|% Change in Private Employment
|Change in Employment||+0.5 million||+1.8 million||+1 million|
|% Change in Business Capital Stock||0%||-0.6%||-0.25%|
|Change in Revenues (Dynamic Score)||+$50 billion||+$700 billion||+$300 billion|
Note: Estimates for changes in economic output and labor force participation are rounded to the nearest $100 billion and 100,000 people, respectively.
If enacted, JCT estimates that Camp's discussion draft would increase labor force participation by an average of between 0.3 and 1.5 percent each year this decade, and increase private sector employment by between 0.4 and 1.5 percent. In addition to the improved incentives for workers to find jobs and higher after-tax incomes, businesses would also seek to employ more workers as the return on capital fell slightly, incentivizing some substitution of capital for more labor. JCT expects that business investment would likely fall later in the decade, as the repeal of accelerated depreciation in 2016 and the longer amortization of intellectual property expenses begin to outweigh the positive effects of lower tax rates on business income.
For a complete overview of Chairman Camp's draft, see CRFB's analysis here.