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72 IRET Congressional Advisory 1 (1998)

handle is hein.taxfoundation/iretcgadv0069 and id is 1 raw text is: August 13, 1998 No. 72 CBO LOW-BALLS BENEFITS OF THE GINGRICH TAX PLAN The Congressional Budget Office (CBO) study of Speaker of the House Newt Gingrich's tax cut proposal is badly flawed. The tax cut would do more for the economy than the CBO projects. Mr. Gingrich has introduced the Economic Growth Act of 1998, H.R. 4125. Representative Bill Archer, Chairman of the House Ways and Means Committee, asked the CBO to analyze the potential effect of the legislation on economic growth and revenue. The CBO report, An Analysis of the Potential Macroeconomic The Congress Effects of the Economic (CBO) study Growth Act of 1998, suggests House Newt disappointingly small benefits proposal is ba from the proposal. cut would One of the provisions of economy than the Act is a proposal to reduce the top tax rate on capital Static revenue loss from a rate cut. A static estimate of the revenue loss from the proposed capital gains tax rate reduction would be about $16 billion a year, or $80 billion over five years. Using Joint Tax Committee and CBO methodology, about 70 percent of the static revenue loss will disappear, on a long term basis, due to additional trading of assets and reporting of gains. That would leave a net revenue loss of only $5 billion a year, or $40 billion over 5 years. The revenue effect does not end with the post- unlocking revenue estimate, however. The cut in the capital gains tax lowers the cost of capital, and raises investment, productivity, wages, employment, and output. The rise in GDP would bring in additional revenues from other taxes (the dynamic effect). The CBO has brought together an advisory panel of researchers and modelers to examine in dynamic terms the issue of the effect of the capital gains tax (and other major tax changes) on GDP and income. There was, as always is the case among a group of economists, a divergence of opinion. Some participants ional Budget Office of Speaker of the Gingrich's tax cut dly flawed. The tax 1o the more for the CBO proects. predicted very little dynamic feedback. Moderate and larger responses were also predicted. A middle of the road dynamic estimate of the consequences of the rate cut on the economy would show an increase in GDP of at least $10 billion. The higher GDP would bring in $3 billion in additional tax revenue, and cut gains to 15 percent, for taxpayers in the 28% tax bracket and above, and to 7.5 percent for taxpayers in the 15% tax bracket. The CBO report focuses on that provision. Other provisions, such as full deduction of health insurance premiums by the self employed and marriage penalty relief, have less bearing on economic output, and are not reviewed (although the proposed cut in the Social Security benefits tax and earnings test would also boost saving and employment). the net revenue loss of the Gingrich proposal to a mere $2 billion a year. The gain in GDP ($10 billion) would be $5 for each dollar of net revenue loss ($2 billion). Put another way, not cutting the capital gains tax rate would cost the country $5 in lost income for each dollar of tax revenue the Treasury would save. That means that everything bought by the government with the proceeds of this tax costs at Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

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