Originally published on Forbes.com.
When I criticized the Tax Foundation’s analysis of the Bernie Sanders plan, one of my commenters, a Giles Chapman, wrote:
another important nugget not included is that the taxfoundation.org is led by a man named scott hodges who has contributed to the american legislative exchange council as well as receiving funding for the site directly from the koch brothers.
I left Mr. Chapman’s apparent distaste for upper case letters intact. Surprisingly Giles Chapman is not an uncommon name and I have not tried to narrow down which GC made the comment.
Dammit Jim
Having just finished Janet Mayer’s Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right, I could not resist poking around a bit to see if there is evidence that the Tax Foundation is part of the Kochtopus. You might be able to make a case just from the Wikipedia entry, but I ended up deciding to let that be something for Jane Mayer to look into, because in the end, such discussions coming from either the left or the right, ends up being ad hominem arguments. Just because the Koch brothers or George Soros think something is a good idea does not make it a bad idea , regardless of what you might think of the Koch brothers or George Soros. Also as I may too often remark – Dammit Jim, I’m a tax blogger, not an investigative reporter.
The Model
So instead, I decided to talk to Kyle Pomerleau, Director of Federal Projects, at the Tax Foundation to get a better understanding of the Tax Foundation model. I was focused on a particular point in the analysis of the Sanders plan. One of the sources of revenue in the plan is a not insubstantial $3.551 trillion (All the projections cover ten years) from the elimination of health tax expenditures. The TF model shows that as reducing GDP by 0.87% giving the change a dynamic score of $3.259 trillion. That is actually not that big an adjustment. Taxation of capital gains and dividends raises $1.186 trillion on a static basis but a 2.42% GDP hit brings it down to $265 billion. Only stating it that way, is probably not the most accurate way to describe the model.
Based on how Mr. Pomerleau described the model to me, dynamic might not be the best way to put the scoring. The model is not a forecast or projection of what is going to happen. It is more of a counterfactual, based on assumptions derived from classical economics. There are two components to the economy – labor and capital. The assumption is that if you lower the price of either of them, you will get less of them resulting in a lower GDP, which means less to tax. Of course, that is a simplification. A more detailed discussion of the model is here.
What Is Left Out
The model does not seem to incorporate much from the new field of behavioral economics, which I have dubbed stupinomics, since it studies the ways in which actual people deviate from the rational actor, homo economicus, that drives classical economics. Old HE would probably not be buying Powerball tickets or taking out refund anticipation loans, but that stuff still happens. Regardless, the TF model tells us is what the economy would be like if we had had the proposed tax model for a long time and presumably what the economy will be like after we get through the long march to equilibrium, which is bound to be interrupted by some other tax changes between now and then – everything else being equal.
And it does not consider government spending and how that affects the economy or our well-being. Bottom line, the Tax Foundation analysis will, by its nature, make tax increases look bad and tax decreases look good. TF does not cover this up. Mr. Pomerleau indicated that what they mainly study is taxes Thus the benefits that might come from government expenditures are not included in their modeling. Apparently, they might be working on that.
Critics of the TAG model note that the model does not currently estimate the effects of changes in private and government spending policies, and focuses primarily on changes in tax policy. The Tax Foundation is seeking to expand the model to include the economic effects of spending. However, the expanded model will not involve the use of neo-Keynesian multipliers.
Mr. Pomerleau indicated that there is significant empirical support for the assumptions behind the model. I have a hard time accepting some of them based on anecdotal evidence gathered over my career. It seemed to me that people worked as hard or harder back in the day when marginal rates were higher, but that may be a naive outlook.
The Bright Side
Nonetheless, there is much that the TF cannot capture and it does not even pretend to. If we were actually able to have a single payer medicare for all system, I think there might be some very positive effects on entrepreneurship and small business formation. In the current system, concerns about health insurance tend to tie people to jobs. Companies that provide health care coverage now might find it a lot simpler to just pay 6.4% and also be relieved that they are not picking up the tab for the other half of a couple that works somewhere that does not provide insurance. Something that I have not seen discussed anywhere is what effect single payer health care might have on workers comp and liability insurance rates.
Also if you allow for a benefit on the health care side of things, the Sanders tax plan does not really start hurting until you get north of $250,000 per year. I don’t know about your field, but in public accounting that lets off almost all the people doing actual work, says the grizzled old fired managing director with a bad attitude and poor executive presence.
I really like what the Tax Foundation does, but I tend not to like too much what some people do with what the Tax Foundation does. This piece in the American Spectator concluding that Ted Cruz has the best tax plan is typical. Referring to Clinton and Sanders plans we get:
The Tax Foundation has recently ripped both of these plans, finding that they would lower business investment and cut middle income pay by about 10 percent over a decade. Somehow making the middle class poorer is supposed to strike a blow for equality. Since most of the rich who would be plucked are business owners and investors, wage and salary workers will suffer the collateral damage from the class warfare shots. In short, wealth redistribution is not an economic growth or jobs program.
That is probably not a fair summary of what the Tax Foundation model says, since it does not purport to be a projection and it does not even pretend to incorporate the effect of government spending.
Are There Any Economists Out There
I’m going to give myself the assignment of learning more about the Tax Foundation Taxes and Growth Model and critiques of it. Frankly it does seem to have a bit of right-wing bias built into it, but that does not make it wrong. Commenters more familiar with the dismal science than I am, please weigh in.