[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]







                        DYNAMIC ANALYSIS OF THE
                         TAX REFORM ACT OF 2014

=======================================================================

                                HEARING

                               before the

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 30, 2014

                               __________

                            Serial 113-SRM03

                               __________

         Printed for the use of the Committee on Ways and Means



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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

SAM JOHNSON, Texas                   SANDER M. LEVIN, Michigan
KEVIN BRADY, Texas                   CHARLES B. RANGEL, New York
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
DAVID G. REICHERT, Washington        XAVIER BECERRA, California
CHARLES W. BOUSTANY, JR., Louisiana  LLOYD DOGGETT, Texas
PETER J. ROSKAM, Illinois            MIKE THOMPSON, California
JIM GERLACH, Pennsylvania            JOHN B. LARSON, Connecticut
TOM PRICE, Georgia                   EARL BLUMENAUER, Oregon
VERN BUCHANAN, Florida               RON KIND, Wisconsin
ADRIAN SMITH, Nebraska               BILL PASCRELL, JR., New Jersey
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas                 ALLYSON SCHWARTZ, Pennsylvania
ERIK PAULSEN, Minnesota              DANNY DAVIS, Illinois
KENNY MARCHANT, Texas                LINDA SANCHEZ, California
DIANE BLACK, Tennessee
TOM REED, New York
TODD YOUNG, Indiana
MIKE KELLY, Pennsylvania
TIM GRIFFIN, Arkansas
JIM RENACCI, Ohio

        Jennifer M. Safavian, Staff Director and General Counsel

                  Janice Mays, Minority Chief Counsel

                                 ______

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                   PATRICK J. TIBERI, Ohio, Chairman

ERIK PAULSEN, Minnesota              RICHARD E. NEAL, Massachusetts
KENNY MARCHANT, Texas                JOHN B. LARSON, Connecticut
JIM GERLACH, Pennsylvania            ALLYSON SCHWARTZ, Pennsylvania
AARON SCHOCK, Illinois               LINDA SANCHEZ, California
TOM REED, New York
TODD YOUNG, Indiana


















                            C O N T E N T S

                               __________

                                                                   Page

Advisory of July 30, 2014 announcing the hearing.................     2

                               WITNESSES

Scott Hodge, President, Tax Foundation, Testimony................    90
John Buckley, Former Chief Tax Counsel, Committee on Ways and 
  Means, and Former Chief of Staff, Joint Committee on Taxation, 
  Testimony......................................................   101
J.D. Foster, Deputy Chief Economist, U.S. Chamber of Commerce, 
  Testimony......................................................   112
John Diamond, Professor, Rice University, Testimony..............    38
Douglas Holtz-Eakin, President, American Action Forum, Testimony.    50
Curtis Dubay, Research Fellow, Heritage Foundation, Testimony....    59

                       SUBMISSIONS FOR THE RECORD

The Advertising Coalition........................................   139
 
             DYNAMIC ANALYSIS OF THE TAX REFORM ACT OF 2014

                              ----------                              


                        WEDNESDAY, JULY 30, 2014

             U.S. House of Representatives,
                       Committee on Ways and Means,
                   Subcommittee on Select Revenue Measures,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:01 a.m., in 
room 1100, Longworth House Office Building, the Honorable Pat 
Tiberi [Chairman of the Subcommittee] presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY

Chairman Tiberi Announces Hearing on Dynamic Analysis of the Tax Reform 
                              Act of 2014

1100 Longworth House Office Building at 10:00 AM
Washington, July 23, 2014

    Congressman Pat Tiberi (R-OH), Chairman of the Subcommittee on 
Select Revenue Measures, today announced that the Subcommittee will 
hold a hearing on dynamic analysis of the discussion draft of the Tax 
Reform Act of 2014, as released by Chairman Dave Camp on February 26, 
2014. Specifically, the Subcommittee will review dynamic analyses of 
the macroeconomic effects of the draft conducted by outside economists, 
the role of dynamic analysis in assessing tax reform proposals, how 
dynamic analysis can provide recommendations to strengthen the draft, 
and recommendations for improving the availability and use of dynamic 
analysis. The hearing will take place on Wednesday, July 30, 2014, in 
1100 Longworth House Office Building, beginning at 10:00 A.M.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    As part of the Committee's pursuit of comprehensive tax reform, 
Chairman Camp released on February 26, 2014, a discussion draft of 
legislation intended to overhaul the Tax Code. The draft was intended 
to achieve a simpler, fairer, and pro-growth Tax Code. In the interests 
of transparency and accuracy, the Chairman continues to seek feedback 
from a broad range of stakeholders, taxpayers, practitioners, 
economists, and members of the general public on how to improve the 
discussion draft.
      
    The Joint Committee on Taxation (JCT) serves a critical role in the 
legislative process by providing expert and impartial analysis of the 
potential effect of proposals to change U.S. tax policy. In evaluating 
the discussion draft, JCT conducted both a static and a dynamic 
estimate. Under the static analysis, the draft is projected to reduce 
the deficit by $3 billion over the 10-year budget window. The dynamic 
analysis released by JCT demonstrates that the draft will increase 
output, consumption, and employment over that same 10-year window. 
Outside analyses performed by a wide array of economists found similar 
results.
      
    In announcing this hearing, Chairman Tiberi said, ``Fixing our 
broken Tax Code will strengthen the economy to help employers create 
more jobs and increase wages for American families. Chairman Camp has 
worked hard to produce a tax reform draft that does just that. This 
hearing provides a good opportunity to hear economic analysis on how 
the draft achieves this goal and to learn about more actions the 
Committee can take to improve the draft and the accuracy of our 
measurements.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on macroeconomic analyses of Chairman Camp's 
discussion draft and the role of dynamic analysis in evaluating options 
for tax reform in general. The hearing will address: (1) dynamic 
estimates of the effects of Chairman Camp's discussion draft; (2) how 
dynamic analysis can help to assess the impact of tax reform; (3) what 
changes could be made to the draft to achieve stronger growth; and (4) 
what changes could be made to JCT's models, assumptions, or procedures 
to obtain more transparent, accurate, and robust results.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
written comments for the hearing record must follow the appropriate 
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informational forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``Hearings.'' Select the hearing for 
which you would like to submit, and click on the link entitled, ``Click 
here to provide a submission for the record.'' Once you have followed 
the online instructions, submit all requested information. ATTACH your 
submission as a Word document, in compliance with the formatting 
requirements listed below, by the close of business on Wednesday, 
August 13, 2014. Finally, please note that due to the change in House 
mail policy, the U.S. Capitol Police will refuse sealed-package 
deliveries to all House Office Buildings. For questions, or if you 
encounter technical problems, please call (202) 225-3625 or (202) 225-
2610.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
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written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word format and MUST NOT exceed a total of 10 pages, including 
attachments. Witnesses and submitters are advised that the Committee 
relies on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental 
sheet must accompany each submission listing the name, company, 
address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov/.

                                 

    Chairman TIBERI. The hearing will come to order. Good 
morning and thank you for joining us with our subcommittee's 
hearing on dynamic analysis of Chairman Camp tax reform 
discussion draft, the Tax Reform Act of 2014.
    Today we examine the discussion draft of the Tax Reform Act 
of 2014 released by Chairman David Camp in February. The draft 
attempts to overhaul the Tax Code to create one that is 
simpler, fairer, and more pro-growth. I applaud Chairman Camp 
for his work on the draft and for working to fix our broken Tax 
Code to strengthen the economy, help employers create more 
jobs, and increase wages for American families.
    An important goal for any tax reform plan is economic 
growth, and the Joint Committee on Taxation for the first time 
provided a dynamic analysis of the tax legislation where it 
found the draft will increase GDP by as much as $3.4 trillion 
and would create nearly 2 million private sector jobs.
    [The information follows:]
    
    
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     Chairman TIBERI. Chairman Camp requested feedback on the 
draft on the JCT analysis on economic modeling generally and 
how to treat dynamic revenue that results from a macroeconomic 
analysis of the discussion draft. I am pleased that so many 
stakeholders and economists have offered feedback thus far, and 
during the hearing this morning we intend to examine some of 
the feedback relating to dynamic analysis.
    The Tax Reform Act is a huge, important step forward in 
creating a better Tax Code for both individuals and businesses, 
but that is not to say it can't be improved upon. And that is 
why Chairman Camp released this as a discussion draft, to 
gather feedback from stakeholders and experts in a public and 
transparent manner.
    I am looking forward to our great bipartisan discussion 
today. I thank our witnesses for being here and taking the 
time. I now yield to Ranking Member Neal for his opening 
statement.
    Mr. NEAL. Thank you, Mr. Chairman. Thanks for calling this 
important hearing on dynamic scoring. As many of us know, this 
is an issue that has been around for a considerable period of 
time. And I would note that, as the chairman described, the 
response to Mr. Camp's proposal on the Republican side, I think 
it is fair to say, was more dynamic than the response on the 
Democratic side.
    What it does allow is the opportunity to have an open and 
honest dialogue about dynamic scoring today. The witnesses that 
the committee has put before us are all distinguished. I have 
known many of them in different capacities and have great 
regard for the suggestions that they have made time and again. 
It is one of the best things about serving on the Ways and 
Means Committee, you really do hear from good witnesses, and 
the people that you associate with on this committee I think 
are superb in their talent.
    So with the panel that is assembled today we can finally, I 
hope, put to bed a few widespread and seemingly widely held 
myths. One of the most dangerous is the notion that tax cuts 
pay for themselves. As congressional observers can verify, the 
notion that tax cuts pay for themselves was a rallying cry for 
the deficit finance tax cuts from the previous decade--and, 
frankly, the issue has been hanging around a lot longer than 
that--tax cuts that failed to produce the job gains and the 
economic growth that we were promised in the runup to their 
passage.
    From my perspective, to date this conversation surrounding 
dynamic scoring has been a bit intellectually short. During the 
last two decades, dynamic scoring has been a way to push tax 
cuts, whether deficit financed or not.
    Do some tax cuts generate income growth? Yes. But to apply 
the assessment that all tax cuts pay for themselves, reduce the 
deficit, or grow the economy really doesn't make sense 
economically.
    You should know, I am not categorically opposed to the 
discussion or the approach to dynamic scoring that will be 
outlined today. I believe that Congress and the Joint Committee 
on Taxation and the Congressional Budget Office should all have 
the best ideas and the opportunity to put those policies 
forward that will influence the overall economic discussion, 
but not to miss the point that for the last two decades dynamic 
scoring has been a euphemism for enacting large tax cuts.
    The point that is often overlooked with dynamic scoring 
comes up when there are two sides of the ledger. If we are to 
consider the positive effects that tax cuts may or may not have 
on the economy, equally we should consider the positive effects 
that government spending and investment policies and 
initiatives would have on the economy as well.
    Might I suggest that the dust-up that we are about to have 
in the next 48 hours over a big infrastructure program, I 
perhaps would be all in favor of applying dynamic scoring to 
the idea of what greater efficiencies would be caused by a 
large infrastructure bill based on the notion that we might not 
be able to predict everything that would happen tomorrow, but 
certainly over years to come it may well inure to the benefit 
of American people.
    So any time that we are to consider changing how CBO and 
JCT keeps score, we also should also be mindful that these 
changes have lasting consequences, and in doing so we may be 
undermining one of the few remaining nonpartisan and well 
informed commentators of the Nation's economic health. I 
understand the short-term political gains for pushing tax cuts, 
but again I caution against pursuing this track singularly.
    Let me conclude by thanking the chairman. It has been a joy 
to work with him over the years that we have both served on 
this Select Revenue Subcommittee. And I yield back my time.
    Chairman TIBERI. Thank you.
    Chairman TIBERI. Before I introduce today's witnesses, I 
ask unanimous consent that all members' written statements be 
included in the record. Without objection, so ordered.
    Chairman TIBERI. We now turn to our panel of distinguished 
witnesses, and I would like to welcome all of them.
    First, Mr. John Diamond, a professor at Rice University in 
Houston, Texas.
    Thank you for being here.
    Second, Mr. Doug Holtz-Eakin, president of the American 
Action Forum here in Washington, D.C.
    Thank you, Doug.
    Third, Mr. Curtis Dubay, research fellow at The Heritage 
Foundation here in Washington, D.C.
    Thank you for being here.
    Fourth, Mr. Scott Hodge, president of the Tax Foundation, 
also here in Washington, D.C.
    Thank you for being here, Scott.
    Fifth, Mr. John Buckley, former chief tax counsel, 
Committee on Ways and Means, and former chief of staff for the 
Joint Committee on Taxation here in Washington, D.C.
    Thank you, John, for being here.
    And last but not least, Mr. J.D. Foster, deputy chief 
economist at the Chamber of Commerce, also here in Washington, 
D.C.
    Thank you all for being here and sharing with us your 
testimony.
    First we are going to have Mr. Diamond.
    You are recognized for 5 minutes.

STATEMENT OF JOHN DIAMOND, PROFESSOR, RICE UNIVERSITY (HOUSTON, 
                              TX)

    Mr. DIAMOND. Chairman Tiberi, Ranking Member Neal, and 
distinguished Members of the Committee, it is a pleasure to 
present my views on the importance of dynamic analysis.
    So why is dynamic analysis important? A popular management 
adage is, if you can't measure it, you can't manage it. Dynamic 
analysis provides valuable information about the effects of 
policy proposals on economic growth, and it is important that 
we use this information to better manage U.S. fiscal policy. 
Routinely disregarding information on the macroeconomic effects 
of alternative proposals leads to a budget process that 
undervalues proposals that increase the size of the economy and 
overvalues proposals that shrink the size of the economy. We 
can no longer afford a budget process that fails to maximize 
economic growth.
    We can learn several lessons from three dynamic analyses of 
the Tax Reform Act of 2014, one using the model I developed 
with my colleague George Zodrow at Rice University, one by the 
JCT, and one by the Tax Foundation.
    We find that the Tax Reform Act would increase GDP by 1.2 
percent after 5 years, by 2.2 percent after 10 years, and by 
3.1 percent in the long run.
    The analysis using the OLG model by JCT found significantly 
different results, and there are several explanations for that. 
One, JCT assumes that the initial level of corporate income tax 
revenues lost due to income shifting is 20 percent of the 
corporate income tax base, whereas Dr. Zodrow and I use 24 
percent. Also, JCT assumes that excess revenues go to 
increasing government transfers, rather than further corporate 
income tax rate reductions, as in our analysis.
    Further rate reductions enhance growth effects because the 
associated decline in income shifting allows for further rate 
reduction that is obtained without the negative effects of base 
broadening. An additional difference is that we account for the 
negative impact of base broadening on real wage rates and thus 
labor supply in the model.
    The Tax Foundation found much smaller results, with only a 
0.2 percent increase in GDP in the long run, as the cost of 
capital increased under TRA, but the Tax Foundation analysis 
discusses, but then ignores the benefits of reduced income 
shifting, the benefits of the reallocation of firm-specific 
capital to the United States, and the benefits of moving to a 
territorial system. We included these important factors.
    The results indicate that a base-broadening, rate-reducing 
corporate income tax reform is more likely to result in 
positive macroeconomic effects if the initial amount of income 
shifting is large and is reduced significantly when the 
statutory corporate income tax rate in the U.S. declines; if 
the accelerated depreciation is retained, instead of being used 
as a base-broadening provision; and if the base-broadening, 
rate-reducing reform includes a move to a territorial system, 
including anti-base-erosion proposals.
    In addition, base-broadening, rate-reducing individual 
income tax reform can also increase GDP, depending on the size 
of the rate reductions, the base broadeners chosen, and the 
extent to which individual income tax reductions are financed 
by base broadening in the corporate sector. However, more 
analysis is needed, and several principles should guide that 
analysis.
    First, dynamic analysis should be used to compare the 
macroeconomic effects of various programs. Second, dynamic 
analysis should examine and present results of the effects of 
groups of provisions separately from the entire proposal. For 
the Tax Reform Act, it would be interesting to see the effects 
of the individual provisions, the effects of the rate-reduction 
and base-broadening provisions in the corporate sector, and the 
effects of the territorial provisions separately. This would 
both increase information and increase the reliability of the 
analysis. Third, the analysis should be timely and transparent, 
with enough information released so that others can replicate 
the results.
    Let me end by noting that JCT has created a great deal of 
institutional knowledge on microdynamic scoring, and it leads 
to an immense ability of credibility in those results. I am 
confident they can do the same for dynamic analysis.
    Chairman TIBERI. Thank you, Mr. Diamond.
    [The prepared statement of Mr. Diamond follows:]
    
    
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    Chairman TIBERI. Mr. Holtz-Eakin, you are recognized for 5 
minutes.

 STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION 
                     FORUM (WASHINGTON, DC)

    Mr. HOLTZ-EAKIN. Chairman Tiberi, Ranking Member Neal, 
Members of the Committee, it is a great privilege to be here 
today and to again discuss the important issue of dynamic 
scoring, which I had first discussed with this committee over a 
decade ago. It will come as no surprise that I really want to 
make three points in my remarks. First, to endorse the 
principle of dynamic scoring and to stress that it can be done 
in a disciplined fashion to rank all proposals in a fair way. 
Second is to emphasize that it is perhaps most important in the 
area of comprehensive tax reform, to look at all the impacts. 
And then third, to comment briefly on the committee draft 
proposal itself.
    So on the principle of dynamic scoring, as the members well 
know, the idea is to look at the conventional scoring that the 
CBO and Joint Committee would do, which is to look at all of 
the revenue and expenditure effects in the Federal budget from 
enacting legislation, but to then take the further step of 
looking at the impact of those proposals on macroeconomic 
performance, the rate of economic growth, the rate of 
inflation, the rate of unemployment, and the like, and the 
feedbacks that that economic performance would have on the 
Federal budget in both the tax and the expenditure sides, so 
that you incorporate all of the impacts of moving from current 
law, to the proposal, into the analysis.
    And as a matter of disciplined budgeting and good economic 
policy, it is important to recognize all those effects so that 
two proposals that are the same budgetarily but have very 
different growth effects are identified as not the same, but in 
fact one is inferior and the one that produces more growth is 
superior. And it is important for the committee to have that 
information, as Mr. Diamond mentioned.
    There are lots of important issues which I lay out in my 
written testimony about how you might want to institutionalize 
this. It is important to have rules, for example, on what 
monetary policy will be doing during the fiscal policy 
simulations. It is important to understand how to balance the 
long-run budget in the process of analyzing these proposals.
    But all of these are in fact just rules by which scoring 
would be done. There are a large set of rules by which 
conventional scoring is done at the moment. You can develop 
rules to do dynamic scoring. And I would encourage the 
committee to move ahead with that so that we have a way to rank 
all proposals in a fair fashion and to bring the economic 
policy impacts into the discussion.
    It is especially important in tax reform. Tax reform, by 
definition, is lowering marginal rates, broadening the base. 
And when you do that, two important things can happen. Number 
one, because tax rates are lower and the base is broader, fewer 
economic decisions are made on the basis of tax influences and 
more on fundamental business conditions or fundamental 
preferences of households and you get rid of a lot of 
misallocations. You get people working the amount that they 
want and not hiding out of the labor force, you get capital 
coming back to the United States from overseas, which is parked 
there now because of Tax Code reasons, and you in general use 
the labor, the capital, and the technologies in the economy 
better. That makes the economy bigger, and you want to 
recognize that in doing the analysis.
    The second thing is that you can in fact remove some of the 
double taxation of saving and investment, and provide better 
incentives for innovation, for accumulation of human capital 
and skills, physical capital investment, and that will make the 
economy grow better. And you want to recognize that in the 
analysis as well.
    If you do what you think is a tax reform and those two 
things aren't happening, you don't have a good tax reform. It 
is important for the committee to know that the policy can be 
improved. And so I think, in this setting especially, doing a 
dynamic score should be part of the process.
    And lastly, if you look at the committee draft, it has 
those characteristics. There is a large literature which has 
looked at the potential benefits of tax reforms, which either 
push us toward a more comprehensive income tax, or in some 
cases push us to a more growth-oriented consumption tax base. 
The committee proposal is at neither of those extremes, but it 
is close enough to comprehensive reform that it would in fact 
generate beneficial growth impacts. Our reading of the 
literature suggests they could be as much as half a percentage 
point over the next 10 years. The estimate you have heard 
before, a little more modest than that. But those are important 
numbers in an economy that is growing too slowly, generating 
too few jobs, and generating too little income growth for the 
American public.
    So I appreciate the chance to be here today and I look 
forward to your questions.
    Chairman TIBERI. Thank you.
    [The prepared statement of Mr. Holtz-Eakin follows:]
    
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    Chairman TIBERI. Mr. Dubay, recognized for 5 minutes.

STATEMENT OF CURTIS DUBAY, RESEARCH FELLOW, HERITAGE FOUNDATION 
                        (WASHINGTON, DC)

    Mr. DUBAY. Good morning, Chairman Tiberi, Ranking Member 
Neal, and distinguished Members of the Committee. The views I 
express in this testimony are my own and should not be 
construed as representing any official position of The Heritage 
Foundation.
    Thank you for having me here today to discuss the important 
issue of dynamic scoring and tax reform. I have been working on 
tax reform for a decade now, first at the Tax Foundation, then 
at PricewaterhouseCoopers, and for the last 6 years at 
Heritage. In that time, I have learned the primary reason we 
badly need tax reform is to improve the economy's potential and 
increase incomes and opportunities for all American families.
    Chairman Camp's recently released tax reform proposal was a 
big step in the right direction for finally achieving tax 
reform, in large part because it included a dynamic estimate of 
the plan's income on the economy from the Joint Committee on 
Taxation. The chairman and staff should be applauded for 
securing that estimate.
    Dynamic analysis is the right way to evaluate tax reform 
because we know that tax reform improves the economy. It does 
so by increasing incentives for families, businesses, 
investors, and entrepreneurs to engage in economically 
productive activities like working, investing, and taking 
risks, which are the catalyst for economic growth. And we know 
that they all respond to incentives.
    Traditional static scoring hampers task reform's progress 
because it does not measure how it strengthens the economy. It 
is incomplete. A tax reform plan with only a static score is 
like a business plan without an estimate of profitability.
    Now, there is certainly a reasonable disagreement over how 
responsive families and businesses are when tax rates fall. 
Those are reasons to present a range of estimates, using 
various models and an array of elasticities that fall within 
the mainstream estimates from empirical academic literature, 
not for shunning dynamic analysis altogether.
    As my colleagues in The Heritage Foundation's Center for 
Data Analysis, or CDA, wrote recently, it is better for 
estimates of tax reform to be approximately right than 
precisely wrong. Static scoring is precisely wrong.
    CDA conducted a dynamic estimate of the Camp plan. They 
found it would increase economic output by $92 billion per year 
during the 10-year budget window and it would increase 
employment by 548,000 jobs per year. CDA found these positive 
impacts because of the lower rates on families and businesses 
the plan institutes in its first few years and the move to a 
territorial system.
    According to CDA's estimates, the growth effects of the 
Camp plan taper off the longer it is in place, as policies that 
increase tax on investment, and therefore increase the cost of 
capital, have time to go fully into effect. Those include 
longer depreciation lives for capital and amortization of 
research and development and advertising expenses.
    To reverse that downward trend and increase the Camp plan's 
positive impact on growth, current depreciation schedules at 
minimum would need to be restored and advertising and R&D 
returned to fully deductible expenses. Lower rates would also 
help make the Camp plan more pro-growth. The top rate under the 
plan is 38.3 percent. That is only 5 percentage points below 
where it is today.
    Chairman Camp understandably chose to adhere to the flawed 
revenue baseline constructed by the Congressional Budget Office 
when making his plan revenue neutral. The revenue target that 
baseline sets is too high, because it assumes that Congress 
intends for expiring tax policies to expire permanently.
    Under the reasonable assumption that Congress does not 
intend to raise taxes by default, Chairman Camp's plan could 
raise nearly $1 trillion less and still remain revenue neutral. 
That money could be used to reverse the policies that raise the 
cost of capital and reduce the plans top rate significantly.
    Chairman Camp's proposal has given renewed energy to the 
tax reform debate. A key to maintaining that momentum is to 
make sure JCT continues offering dynamic estimates of tax 
reform and other major pieces of tax legislation. The more JCT 
does dynamic estimates, the better it will become at doing them 
and the more opportunities outside experts will have to help 
JCT refine its methodology to improve it analyses even more.
    Thank you again for having me here today, and I look 
forward to your questions.
    Chairman TIBERI. Thank you.
    [The prepared statement of Mr. Dubay follows:]
    
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    Chairman TIBERI. Mr. Hodge, you are recognized for 5 
minutes.

      STATEMENT OF SCOTT HODGE, PRESIDENT, TAX FOUNDATION 
                        (WASHINGTON, DC)

    Mr. HODGE. Thank you, Mr. Chairman, Ranking Member Neal, 
Members of the Committee. I appreciate the opportunity to be 
here today.
    There are many very good reasons to overhaul the Tax Code, 
simplicity and equity, but really economic growth ought to be 
the primary objective. And while we all may want a simpler, 
more equitable Tax Code, if that kind of a tax system actually 
leads to less economic growth, we ought to think twice about 
some of those policies.
    And this is why dynamic analysis must be an essential tool 
of any effort to reform the Tax Code. There are many base 
broadeners that may seem like a reasonable tradeoff for a lower 
rate when measured on a conventional basis, but what we find 
actually turn out to be antigrowth when measured on a dynamic 
basis.
    And let me echo Mr. Diamond that in order to do tax reform 
right, members should be provided a dynamic analysis of each 
component of the plan as it is being put together, not just at 
the end of the process after it is all done. And only then will 
members know which components maximize growth and which don't.
    However, economic growth should not be an accidental 
outcome of tax reform or the process. Before even beginning to 
think about the process of tax reform, lawmakers ought to set 
out a goal, an objective for how much economic growth they hope 
to achieve as a result of their tax reform plan. Any policy 
that subtracts from that goal ought to be rejected. Any policy 
that adds to it should be accepted.
    And let me echo my colleagues that Chairman Camp's plan has 
many positive features that by themselves would promote 
economic growth and competitiveness. And chief among those are 
the lower rates on corporate and individual tax rates and 
eliminating the AMT. And when we modeled these policies in 
isolation with no offsets, we found that they would boost GDP 
growth by nearly 5 percent and create more than 5 million new 
jobs.
    And we also found that on a dynamic basis these rate cuts 
were much less costly than they appear on a static basis, as 
much as 60 percent less costly for the corporate rate cut and 
20 percent less costly for the individual rate cut. Actually, 
the corporate rate cut pays for itself beyond the budget 
window.
    However, what we found is that many of the offsets that 
were required to keep the chairman's plan revenue neutral on a 
static basis had the effect of dampening the growth potential 
of the plan over the long term. And when we modeled the 
chairman's plan, we found that the plan would increase GDP by 
0.22 percent over the long run.
    However, we also found that because the plan raised the 
cost of capital in a number of ways it would reduce the capital 
stock modestly, which would slightly decrease pretax wages. But 
because the plan reduces marginal tax rates on labor income, it 
would raise after-tax wages slightly, and that in turn would 
encourage more labor force participation and create as many as 
486,000 full-time jobs. But what these results mean, though, is 
that people would be working longer, but producing less total 
output with less capital.
    However, what we found was that by modifying just a few of 
the plan's provisions that raise the cost of capital, we can 
generate even more economic growth. For instance, if we just 
maintain the current MACRS depreciation system, as opposed to 
the ADS system that is in the current plan, we could boost GDP 
growth by 1.3 percent and create as many as 685,000 jobs.
    In a similar way, we modeled the original Camp plan with 50 
percent bonus expensing on a permanent basis, and found that 
such a plan would increase GDP by nearly 2 percent and create 
as many at 780,000 new jobs.
    Well, before I conclude, I do want to say that the Joint 
Committee on Taxation does deserve credit for doing a dynamic 
analysis to the chairman's plan. However, the JCT does invite 
some criticism of its work because of the rather opaque way in 
which it presents its results, and the lack of transparency in 
documenting how it produces the results that it does. As my 
seventh grade math teacher said, show me your work. And that is 
what we would like to see, because the Joint Committee has made 
substantial changes to their models over the last decade or so, 
and it is time they subjected those changes and their core 
models to review by experts in the field. And if members are 
going to have any confidence that JCT's estimates are accurate 
and it is using state-of-the-art tools, then it must allow 
outside experts to review those on a peer-reviewed basis.
    Well, despite all the criticism, dynamic scoring is really 
about accuracy, credibility, and having the tools to guide us 
toward tax policies that promote economic growth and steer us 
away from policies that reduce living standards. And by 
contrast, the conventional static analysis leaves lawmakers in 
the dark about the economic consequences of their tax choices, 
and to me that is economic malpractice.
    Relying on static scoring turns tax reform into an exercise 
in arithmetic, rather than an exercise in promoting policies 
that raise people's living standards and the overall health of 
the American economy.
    Thank you, Mr. Chairman. I appreciate any comments you may 
have.
    Chairman TIBERI. Thank you, Mr. Hodge.
    [The prepared statement of Mr. Hodge follows:]
    
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    Chairman TIBERI. And thank you for endorsing my bonus 
depreciation bill. Maybe you can work on my colleague from New 
England.
    Mr. HODGE. Anything we can do to help.
    Chairman TIBERI. Mr. Buckley, you are recognized for 5 
minutes.

STATEMENT OF JOHN BUCKLEY, FORMER CHIEF TAX COUNSEL, COMMITTEE 
 ON WAYS AND MEANS, AND FORMER CHIEF OF STAFF, JOINT COMMITTEE 
                  ON TAXATION (WASHINGTON, DC)

    Mr. BUCKLEY. Chairman Tiberi, Ranking Member Neal, thank 
you and the rest of the committee members for the opportunity 
to speak before you today.
    I think it is important to understand that all of the 
models being discussed today are models that are based on what 
I call supply-side principles, the notion that increasing the 
number and supply of people willing to work will automatically 
translate into greater economic growth. I think that theory is 
no longer relevant when we have a world economy where there are 
virtually unlimited supplies of labor overseas and U.S. 
multinationals responding to market outcomes--this is not due 
to any distortion--responding to market outcomes are 
increasingly accessing those unlimited labor supplies to 
produce goods and services.
    I think the question is quite simple when you look at these 
models: Is the basic economic challenge facing this country a 
lack of jobs or too few people looking for work? I think we all 
know what the answer to that question is. Yet, the models that 
we use today, that are being discussed today, assume that 
increases in labor supply will automatically translate into 
increased economic growth. They handle the problem of 
unemployment in most models by simply assuming it does not 
exist.
    I think it is important for the members to realize that the 
models have been totally erroneous in their projections in the 
past. They have predicted severe economic issues from the 1993 
tax increases that did not occur. Indeed, the period following 
the 1993 tax increase was one of fairly robust economic growth. 
They projected large benefits from the 2001 and 2003 tax 
reductions. Again, that did not occur.
    I think one reason why those projections have been wrong is 
that the models in large respect are divorced from reality. And 
here I want to use Professor Diamond's model as an example. He 
does not analyze the proposal against today's economy. He 
assumes we have an economy with no unemployment and an economy 
where people always act in their best interest, guided by the 
ability, with perfect foresight, to foresee the future.
    He does not analyze the actual Camp proposal. He assumes 
that the Camp proposal will be accompanied by massive 
reductions in entitlement programs to bring our budget to a 
sustainable level. The amount of entitlement programs assumed 
in his model would be at least $2 trillion over the next 10 
years, with a lot more to follow.
    He assumes that the Camp bill will further reduce the 
corporate rate to 20 percent, which does have the effect of 
reducing the increase in the cost of capital that the prior 
witnesses have talked about that would occur under the actual 
Camp proposal.
    Mr. Chairman, I think this committee is wise to examine 
dynamic scoring. I don't think it is wise to get involved in 
the argument of which model is best and which assumptions are 
appropriate. I think they should look at the underlying 
principles that underlie these models and examine why they may 
no longer be relevant.
    In the 20-year period preceding 2008, virtually all 
employment growth in this country occurred only in the sector 
of our economy not subject to cross-border competition, and 
most of that employment growth occurred in health care, 
government, and retail. Many believe that we cannot rely on 
those sectors any longer for increased employment 
opportunities.
    Those responses were all due to market forces. A tax reform 
plan based on the primacy of economic neutrality does nothing 
to reverse the market forces that have caused a loss of 
domestic manufacturing employment. Indeed, for reasons that 
have been expressed before, the Camp bill, because it increases 
the cost of domestic capital, will reduce incentives to invest 
in the United States and therefore could be a long-term drag on 
economic growth.
    Chairman TIBERI. Thank you, Mr. Buckley.
    [The prepared statement of Mr. Buckley follows:]
    
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    Chairman TIBERI. Mr. Foster, you are recognized for 5 
minutes.

STATEMENT OF J.D. FOSTER, DEPUTY CHIEF ECONOMIST, U.S. CHAMBER 
                  OF COMMERCE (WASHINGTON, DC)

    Mr. FOSTER. Good morning, Chairman Tiberi, Ranking Member 
Neal, Members of the Committee. My name is J.D. Foster. I am 
the deputy chief economist at the U.S. Chamber of Commerce. 
Thank you for the opportunity to testify this morning on 
dynamic analysis of the Tax Reform Act of 2014.
    I always enjoy when an esteemed tax lawyer pretends he is 
an economist. I would love to have the opportunity to give a 
brief before the U.S. Supreme Court. That would be great fun as 
an economist. I probably wouldn't do very well, but I would 
enjoy it.
    Mr. Buckley notes, quite correctly, that the models we tend 
to use are supply side in nature, and indeed they are, and they 
do, in fact, assume a certain level of full employment. That is 
the same assumption, I should point out, that the Congressional 
Budget Office makes, that despite the poor performance of our 
economy in recent years, the economy will, in fact, get to full 
employment. It is, in fact, the forecast of the administration, 
which forecasts that we will, in fact, get back to full 
employment.
    So one can, of course, question whether or not that will 
ever be the case under current policies, but at least that is 
the forecast in the basis of the modeling.
    Returning to Chairman Camp's proposal, many lessons have 
been drawn from this, and I will summarize them, the five key 
lessons regarding dynamic analysis, as follows.
    First, the Joint Tax Committee proved dynamic analysis of 
tax policy can be done credibly, refuting longstanding 
assertions to the contrary by some.
    Second, dynamic analysis remains roughly equal parts art 
and science.
    Three, it remains important to consider a variety of models 
under a variety of assumptions. As they gain experience, 
analysts should be able to settle on a single primary model and 
assumption set. But the tools are not there yet. Consequently, 
it remains important at this stage to give heed to each model's 
results under a variety of assumptions.
    And with respect to the tax reform process itself, the most 
important lesson of all by far, the amount of additional growth 
required from tax reform should be made explicit and specific 
at the outset. Comprehensive tax reform offers a unique 
opportunity to strengthen the U.S. economy substantially 
compared to what it otherwise would be, but there is a lot of 
work, as evidenced by the tremendous effort that went into the 
Camp plan, and it would ultimately engage the whole Nation. The 
expected results should justify the effort.
    Proponents of pro-growth tax reform long been handicapped 
at the outset, but in a manner only now apparent. Tax reform is 
typically required to meet a variety of ex ante, identified, 
and precisely quantified design criteria. One such criteria is 
revenue neutrality. A second is distributional neutrality. Each 
of these can be justified as necessary to reform, but each is 
likely to limit the ability of tax reform to improve the 
economy.
    In addition, many tax provisions of little or no overall 
economic consequence hover over tax reform. It is likely some 
would be preserved, further reducing the extent of other 
changes that would be expected to benefit the overall economy.
    In contrast, the most important criterion of all, a 
stronger economy, has been left generic and loose, and thus 
repeatedly suffered at the expense of the other criteria.
    Tax reform's chief objective is a stronger economy. Yet, 
according to the body of analysis available to date, an honest 
appraisal must conclude the Camp proposal shows a fairly modest 
improvement in economic performance, likely much less than 
intended.
    How did this come about? What constrained the effort so 
that it was unable to produce the kind of game-changing 
economic gain intended and what should be expected? Perhaps the 
models used for data economic analysis are yet too rudimentary 
to capture properly the full magnitude of growth effects from 
tax reform. Perhaps.
    Much of the answer is certainly that while a significantly 
stronger economy was the goal, the size of required gain was 
not specified. As has been common in the past, whatever 
additional growth was anticipated, the result was accepted as 
the best one could do, even if it meant the best was not very 
much.
    In contrast, major design criteria such as revenue and 
distributional neutrality were met with fair precision. Put 
simply, in a contest of competing requirements, this was not a 
fair fight. Substantially stronger growth never had a chance. 
Fortunately, the problem being clear, the solution is equally 
clear. Tax reform should proceed with a definite, specific, 
realistic, and quantified goal for a stronger economy.
    Deciding tax reform's goal for economic improvement is a 
debate unto itself. To advance the debate one could contemplate 
an economic growth budget. How much economic growth is lost to 
current policy and how much economic growth are we willing to 
spend through the Tax Code? The analogy to tax expenditure 
analysis is obvious. Here we are not talking about the revenue 
effects of individual provisions, but rather the aggregate 
economic effects of tax policy overall.
    Among competing goals, economic growth should be treated as 
first among equals in the formulation of comprehensive tax 
reform. As we have learned, this requires the goal to be 
explicit, not merely a stronger economy, but how much. Such an 
explicit goal also means we will have a clearer understanding 
of the economy budget, how much economic growth we are willing 
to give up through the Tax Code to achieve noneconomic goals.
    Such a goal and such a debate is only possible because of 
the progress to date in dynamic analysis. This progress must 
continue for the analysis to be credible, and reliable, thus 
for the projected economic improvement to be credible, and thus 
for the comprehensive tax reform to be surely successful.
    Thank you, Mr. Chairman.
    Chairman TIBERI. Thank you, Mr. Foster.
    [The prepared statement of Mr. Foster follows:]
    

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    Chairman TIBERI. Before I ask a question, Mr. Buckley, you 
took issue with a portion of Mr. Diamond's written testimony. I 
would like to comment on a data point in your testimony--in 
your written testimony--that I believe is incorrect, in your 
main thesis about the effects of the Camp draft on business 
investments. You rest this claim that the Camp proposal, and I 
am going to quote from your written testimony, ``would result 
in a net $590 billion tax increase on corporate income and 
business income of individuals,'' end of quote.
    So you cite the JCT macroeconomic analysis for this quote, 
but I think you forget a huge caveat that JCT included in their 
analysis. In fact, the $590 billion claim includes revenue 
raisers on pass-through businesses, but ignores the benefits of 
actual cuts in the individual rate on those same businesses and 
completely ignores the AMT repeal on those same pass-through 
businesses. And while we don't have exact numbers, the business 
tax cuts amount to hundreds of billions of dollars, wiping out 
a large portion of those tax increases that you cite. So I just 
wanted to make that point.
    Mr. BUCKLEY. Mr. Chairman, may I respond----
    Chairman TIBERI. At the end of my questions, you may.
    So going to my question, and I would like to ask Mr. Hodge 
this first, a number of you, including you, Mr. Hodge, 
recommended changes to the discussion draft and argued that the 
tradeoff between tax reduction and cost recovery is 
particularly difficult.
    There are several temporary tax policies, as you know, that 
are designed to speed up cost recovery, but which Congress only 
extends on a temporary basis, many times retroactively. We have 
had this debate. I have introduced, as you know, a couple of 
those that have both passed the House. One, bonus depreciation, 
which you mentioned. Another, Section 179 small business 
expensing. Permanent on both without offsetting them with 
raising taxes elsewhere.
    So, first, do you think that we should assume these 
policies are permanent for purposes of defining tax revenue 
neutrality and distribution neutrality? That would be one 
question.
    And second, how do you believe including permanent versions 
of both of these policies as part of the Tax Reform Act of 
2014, without the need to offset them with higher taxes 
elsewhere, would increase economic growth through tax reform--
--
    Mr. HODGE. As I mentioned, Mr. Chairman, we modeled the 
Camp proposal with 50 percent bonus expensing on a permanent 
basis and found that it significantly increased the growth 
potential of the plan. And we have actually modeled your 
proposal on its own and found that it would achieve quite 
considerable economic growth, create jobs, and more 
importantly, lower the cost of capital, which would be a great 
benefit to workers, it would provide them with better tools.
    And we found that generally when it comes to expensing 
provisions or provisions that allow full cost recovery, that in 
the long run cost recovery or full expensing ends up paying for 
itself. In fact, our model shows that it has greater economic 
benefits than simply lowering the corporate tax rate. We think 
both should be done, and they should be done at the same time, 
and then you will get even greater economic growth.
    But certainly I think those are the kind of provisions 
that, unfortunately, because of the static requirements that 
Chairman Camp was working under, required this tradeoff. And we 
really don't think it was necessary. You could have done both. 
You could have lowered the rate and moved toward expensing, and 
that would have boosted tremendously the growth potential of 
the plan.
    Chairman TIBERI. Mr. Holtz-Eakin, your thoughts on that----
    Mr. HOLTZ-EAKIN. The issue of the baseline is an important 
one. And right now the baseline has this tremendous asymmetry 
where if a spending program exceeds $50 million it is extended 
indefinitely regardless of whether it has been reauthorized by 
Congress or not, but a comparable provision on the tax side is 
assumed to expire, and it leads to an imbalance, in my view, in 
the way policies are evaluated.
    The top criteria should be to treat proposals in a fair 
fashion, and that is a fundamental asymmetry that is built into 
it. I would treat them both the same, thus the bonus 
depreciation would be extended. That has been the practice of 
the Congress, that would be the baseline if we had symmetry 
between the tax and the expenditure side. And so, I think you 
should do that, and you would get better information about the 
real budget outlook, and if you do the dynamic analysis you get 
better information about the economic policy.
    Chairman TIBERI. Mr. Diamond.
    Mr. DIAMOND. I agree with their analysis. I think it would 
be interesting. I think the JCT has actually looked at this in 
a dynamic analysis and I think that was very useful. I do take 
and actually used a version of an OLG model, and I take issue 
with four of the five points that Mr. Buckley raised.
    Chairman TIBERI. I thought you would.
    Mr. DIAMOND. He was correct on one. But he said it is only 
supply-side effects, but the 2003 act used my model and we 
found negative effects in the out years, so that is directly 
contrary to your testimony.
    You dis the idea of perfect foresight, but two very 
prominent economists in 1987, in a book called ``Dynamic Fiscal 
Policy,'' on page 10, give this reasoning for perfect 
foresight: Perfect foresight may seem extreme, but it is 
actually very useful. Actual deviations in individual behavior 
are both likely to understate and overstate. So one household 
may overstate wages and one household may understate wages.
    So perfect foresight is kind of the perfect average. But he 
argues for using a myopic model. A myopic model systematically 
gets the wrong answer, so you assume everybody makes the same 
mistake every period. How can we possibly want that type of 
model over an OLG model, which has a much more reasonable side. 
So again, that is Auerbach, Kotlikoff page 10.
    Supply and demand analysis, it is only supply side. That is 
false. My model includes both a labor supply and a labor 
demand. Firms have a derived labor demand. So we have both 
demand and supply effects. If only supply were to increase, 
what you would get is you would get an increase in labor 
supply, but you would also get a reduction in the wage rate. 
And I would expect any of my Econ 201 students to be able to 
point that out on a test question.
    Finally, this issue of, what do you do with these huge 
projected budget deficits? And his response is that the model 
is totally unrealistic because we don't deal with it. We don't 
actually assume there is a massive reduction in transfer 
payments. I just assume not to look at it, because I can't tell 
you how you all are going to solve that problem.
    But I can tell you this: If I assumed that the problem was 
solved by tax increases, then that implies that tax rates would 
be higher and economic distortions would be larger, and thus 
the positive effects of tax reform would be bigger, not 
smaller. So if I am wrong anywhere, I am wrong for 
underestimating the size of the effects.
    Chairman TIBERI. Mr. Buckley.
    Mr. BUCKLEY. Thank you, Mr. Chairman, for the opportunity 
to respond. First of all, my numbers come out of the Joint 
Committee analysis. What is indisputable from the Joint 
Committee analysis, and from some of the prior witnesses, is 
that the Camp draft will increase the cost of domestic capital, 
leading to projected reductions in business investment. That is 
the result of the Joint Committee analysis using their own 
derived model.
    The point I am trying to make about the economic 
assumptions is that they are quite unrealistic. It is not 
ultimate full employment that is assumed in some of these 
models, it is that we have a full employment economy today and 
at all times.
    Increases in labor supply can automatically translate into 
increased economic growth only an economy of full employment, 
otherwise they just add to the current surplus of unused labor 
supply. These are I think important issues.
    Now let me apologize if Professor's Diamond's model got it 
right in 2003. Then Representative John Kasich stood on the 
floor of the House of Representatives and said every economic 
model in this country projects that this bill is a job killer. 
And they were wrong.
    These models I think are very imperfect guides to policy. 
We have a world with unlimited labor supply overseas. If we do 
not enact policies to increase the competitiveness of U.S. 
businesses in the world economy, the increased labor supply 
will not be utilized.
    Chairman TIBERI. Okay, thank you. We could have a good 
debate here. I am going to ask Mr. Foster to comment on my 
question.
    Mr. FOSTER. Thank you, sir.
    I think this might be time to refer to something I wrote in 
my testimony regarding the process with which one would use 
dynamic analysis in practice. And it starts with how CBO does 
its beginning forecast. First, we get some sense of where the 
economy is today. That in itself is difficult. Then CBO has a 
projection for potential output. That shows we are at full 
employment whenever we get there, where we would be, and how 
that trajectory goes over time. And then the forecaster has to 
figure out some way to draw the line so that we go from where 
we are to the potential.
    What dynamic analysis really does, done properly, is to 
shift that potential, hopefully up. And then we figure out how 
does that change the trajectory from where we are to the new 
potential in going forward. It doesn't assume in practice that 
we are instantly at full employment. We use that for modeling 
exercises now because we are still learning how the models 
work, but in practice one would never do that, any more than 
CBO today in doing an economic forecast, or the administration, 
would say, okay, we think instantly we are at full employment.
    Now, if we are at full employment, that is fine, today we 
are not there. So, one would not use that sort of methodology. 
We are still learning the models, and so we go to the 
abstraction of assuming we are at potential output today. That 
is not how dynamic analysis would ever be used in practice.
    Chairman TIBERI. Thank you.
    Mr. Dubay, do you want to add anything to that?
    Mr. DUBAY. That is exactly what I was going to say, that 
tax reform is about increasing the economy's potential. So when 
you go back to, say, the 1993 tax hikes, it would be more 
accurate to say that the economy won't be as strong because of 
them. We probably would have had stronger job growth had we not 
raised taxes in the early 1990s, during that decade. Same thing 
goes for the tax cuts in the early 2000's, the economy wouldn't 
have grown as strongly as it did had we not cut taxes at that 
point.
    On the issue of the extenders, I think it does hinder tax 
reform, because think about it, according to Chairman Camp they 
had to replace a trillion dollars of revenue they wouldn't 
otherwise had to had you had an equal treatment between tax 
policy and spending policy under the CBO baseline. So that 
means that Chairman Camp was forced into even more difficult 
choices, which included having to extend depreciation lives, 
which cut down on the growth potential. So I think it is 
important to equalize the treatment so that we can get better 
tax policy going forward.
    Chairman TIBERI. Thank you.
    Mr. Neal is recognized.
    Mr. NEAL. Thank you very much, Mr. Chairman. I would like 
to submit for the record a series of posts from Bruce Bartlett, 
who served in the Reagan and Bush senior administrations, as 
well as working on the staff of Representative Kemp and Ron 
Paul.
    Chairman TIBERI. Without objection.
    Mr. NEAL. Thank you.
    I don't think as we pursue this discussion that the 
argument should come to one side favoring tax increases. We are 
trying to figure out the manifestation of sound policy that 
will promote economic growth. I think we can all agree upon 
that.
    And at the same time, I must tell you, as you practice 
economics, you can see how that doesn't always translate into 
the certainty of the speeches on the House floor or the 
meetings in the Oval Office, as I heard Vice President Cheney 
when I was invited, it was just a handful of us, to the Oval 
Office within days of Bush junior becoming President, and we 
went back and forth on tax policy as the President laid out his 
proposal.
    And the President asked me what I thought, and I thought it 
was a very honest opportunity for the conversation. And I 
suggested, Mr. President, why don't we do some modest tax cuts 
for middle-income Americans and continue to pay down the debt? 
The rejection didn't come from the President, it came from Vice 
President Cheney, who had served with me in the House in a 
prior life.
    And I call that to your attention, because even though you 
give us speculation, which I think is very important as to what 
outcomes might occur based on what policies, that is not the 
way it is translated in the course of a campaign. And that is 
part of the difficulty with the soundness of what has been 
offered here today in terms of discussion.
    Now, Mr. Buckley also referenced a key point. I remember 
that discussion as we closed the debate on Clinton's budget in 
1993. And the principal architect in the House at the time of 
dynamic scoring was the majority leader, Dick Armey. He argued, 
juxtaposed with the position of now Governor Kasich, two 
points.
    One, if we embraced that budget that Clinton offered in 
1993--and by the way, credit to Bush senior for the courage 
that he demonstrated--but if we embraced that Clinton budget in 
1993, one of them said, it will take us to fiscal Armageddon.
    The other said as the debate closed with the lights 
dimming, and I recall it vividly, we would head toward the 
greatest depression since the depression of the 1930s by 
endorsing and embracing that budget.
    Instead, two budgets from Clinton and one from Bush senior 
took us to the greatest spurt of economic growth in the history 
of the company.
    Mr. Eakin, appreciating the honesty that you frequently 
bring to these discussions, could you see a path of using 
dynamic scoring to bring about a sound infrastructure 
investment proposal for the country, trying to measure those 
outcomes----
    Mr. HOLTZ-EAKIN. I think there is no reason to restrict 
insights into economic policy to just the tax side of the 
budget, there is no question about that. I think, if I could--I 
don't want to take too much time----
    Mr. NEAL. No, please.
    Mr. HOLTZ-EAKIN [continuing]. It is important to recognize 
that this is a scoring issue and that most of scoring is about 
ranking alternative proposals. There are a lot of claims about 
accuracy. There will always be inaccuracies in this process, 
static, dynamic, whatever you want to liable it. The future is 
a very difficult thing to predict, period.
    But you should do your very best, as CBO does now and the 
Joint Committee does now, to sort of put yourself in the middle 
of the range of outcomes, it could be higher, it could be 
lower, try to get it right in the middle, and systematically 
rank things in the right order. And that is the most important 
thing that you would do if you brought dynamic scoring into the 
process, is get the rankings right, reflecting the best of our 
ability to model the economics.
    The second thing I would say is, these are models. There is 
a lot of criticism about how they are not reality. They are not 
supposed to be reality. The whole point of a model is to 
extract from reality key features you care about. What are the 
key features for economic growth, put those in a model, see the 
growth impacts. And for that reason you shouldn't say, this is 
what is going to happen. You should say, this is what is going 
to be improved by this proposal, although the future may happen 
however it may be.
    And so I don't think it does any good to say, well, there 
was a claim about a model and then we end up having rapid 
growth or a claim about a model and we had bad growth. Those 
are two different thanks.
    Mr. NEAL. Thank you.
    Mr. Buckley, one of challenges that is facing us is this 
notion of the worker participation rate. Today's announcement 
that the economy grew by 4 percent--and we still note there are 
too many people working part time and who are underemployed--
and would you finish the position that you were offering 
earlier with Mr. Tiberi----
    Mr. BUCKLEY. Well, my view is that what you need for long-
term economic growth is for the United States to be competitive 
in the world economy. And that requires incentives for domestic 
investment, whether it is bonus depreciation or current law, 
you need investments in human capital so our workers are more 
productive in the world economy.
    We have a world economy now. Our companies are very good at 
accessing this vast supply of labor overseas. And again, let me 
repeat, all because of market outcomes. This is not a 
distortion in economic. They are going overseas because the 
market tells them to do it.
    We need to have policies to encourage them to stay here 
with investments in physical capital and human resources that 
will make our economy more productive in the long term. You 
should note some of these projections of economic growth assume 
that people work longer at lower wages because of the decline 
in capital investment. That is not my vision of how to improve 
our long-term economic situation.
    Chairman TIBERI. Thank you, Mr. Neal. Having worked for 
John Kasich for 8 years, he certainly doesn't need to be 
defended here. But what I think he would say, which I have 
heard him say a whole lot of times, is that maybe the 
trajectory changed because of the 1994 election, where the 
House was taken by Republicans and the Senate was taken by 
Republicans and the trajectory of spending and the regulatory 
environment changed. That is what he would say. Again, he 
doesn't need defending, but since he is not here, he would take 
issue with a couple of those statements.
    I recognize Mr. Paulsen for 5 minutes.
    Mr. PAULSEN. Thank you, Mr. Chairman. And we appreciate all 
the testimony from the witnesses.
    I am going to start out more specifically, then expand a 
little bit more broadly, and I am going to reference a specific 
tax that was included actually in--repealing a specific tax 
that was included in the Camp draft. It has had a very negative 
impact on companies in Minnesota, in my State and around the 
country. It is the medical device excise tax. And studies have 
shown that this excise tax has led to job reductions, hiring 
freezes, reduced investments in research and development and 
capital infrastructure in the medtech industry.
    Mr. Holtz-Eakin, I will just start with you. Can you please 
describe maybe how repealing this tax and potentially reversing 
some of these trends could generate economic activity that 
could be incorporated into a dynamic analysis, and what would 
the overall effect be of repealing the medical device tax under 
a dynamic analysis look like----
    Mr. HOLTZ-EAKIN. Well, as you know, the American Action 
Forum has actually done some work on the medical device tax and 
found that it does have negative impacts on employment in that 
sector, on investment and innovation in that sector. Those are 
analyses that one can capture under conventional scoring and 
should, but the conventional scoring would then have to take 
those employees and put them somewhere else in the economy, 
take the income that is lost there and have it generated 
somewhere else in the economy. Putting that into the dynamic 
analysis, along with the other features, gives you a better 
trajectory of long-run investment, innovation, and growth.
    I would say that as a matter of practice you don't want to 
have to do full-blown dynamic analysis on every proposal. Only 
large ones merit that kind of treatment.
    Mr. PAULSEN. And then I will just expand a little more 
broadly then. One of the most important parts of developing tax 
reform legislation is analyzing the tradeoffs between lower 
rates and then those provisions that narrow the tax base. And, 
Mr. Hodge, you mentioned earlier that dynamic scoring is really 
about accuracy, credibility, having the tools that guide us 
toward tax policies that promote growth.
    Now, some of the provisions are of little economic benefit 
that are in the code right now and clearly should be eliminated 
to help lower rates, but other provisions have significant 
economic effects that must be weighed very carefully against 
the benefit of lower rates. In the various models that all of 
you have looked at or used to estimate the economic effects of 
the discussion draft, which revenue raisers, other than general 
depreciation rules, have a material impact on the economy----
    I can just start with Mr. Diamond, and we can just kind of 
go down.
    Mr. DIAMOND. Well, any of the revenue raisers that affect 
the cost of capital would have had the largest impact on the 
growth effects. So accelerated appreciation, the research and 
investment credit, other things like that. In addition, revenue 
raisers on the individual side, you would want to get the 
revenue raisers that promote the most efficiency in the 
economy. So maybe reforming the mortgage interest deduction 
would have increased growth because it would have reduced the 
difference in the tax treatment of business capital and housing 
capital. And so some reform on that front, which I have written 
on previously, would also help to alter the proposal to get 
bigger growth effects.
    Mr. PAULSEN. Mr. Dubay maybe.
    Mr. DUBAY. Yeah, I agree. I agree. Anything that increases 
the cost of capital has depressing growth effects. One thing, I 
look at the 10 percent surtax as a pay-for, so that raises that 
top rate up to 38.3 percent, so I look at that as an 
opportunity to increase growth by getting that further down.
    Mr. PAULSEN. Good point.
    Mr. Hodge.
    Mr. HODGE. Yeah, I would echo all of those, and I would 
also throw into the mix the capital gains treatment. And while 
the chairman's proposal doesn't really increase the effective 
capital gains rate that much, we think it would have some 
material effect. And I think, if anything, we should be 
reducing the capital gains rate back to where it was prior to 2 
years ago when it was raised to 20 percent, or now it is 23.8 
percent.
    So all of those things can materially affect the growth 
potential of these plans, and really, it is the cost of 
capital, I will just echo everyone else's sentiment on this, 
that is the driving force here.
    Mr. PAULSEN. Mr. Foster, just from the chamber perspective, 
just the cost of capital. Any other observation?
    Mr. FOSTER. Well, the general rule is that the Tax Code 
inherently distorts economic activity, and so any movement in 
tax reform towards reducing those distortions, any at all, is 
beneficial. What we are not always very good at in economics is 
determining which ones are most harmful to economic growth and 
which are not. But the cost of capital, I think we all agree on 
this panel, is certainly very, very important.
    Mr. PAULSEN. Mr. Chairman, I see my time is almost expired. 
I yield back.
    Chairman TIBERI. Mr. Larson is recognized for 5 minutes.
    Mr. LARSON. Thank you, Mr. Chairman. And let me reiterate 
what my distinguished colleague, Richie Neal, had to say before 
about the importance of these hearings and our distinguished 
panelists and commend the chairman for providing us the 
opportunity to learn from sources, exceptional sources, and 
people that have a great deal to say and have a vast amount of 
knowledge as well.
    And this comes at a critical time in our economy and a 
critical time when people are thinking through going through a 
decision-making process. It also comes at a time when Congress, 
I believe, is at a 7 percent approval rating with the American 
people. And part of the reason that Congress is at that 
juncture is because people have a hard time seeing any action 
or believing what they are saying.
    So what I always like to do is to try to apply what I call 
the Augie & Ray's test to this. Now, I am not an economist, nor 
am I an attorney, and so these are not pure, econometrics are 
not going to be applied here. But what you do get at Augie & 
Ray's is an unfiltered view of the world.
    So, for example, listening here today, I am impressed with 
the varying ways that you can look at the impact of the GDP. 
But at Augie & Ray's, they would say, don't talk to me about 
the GDP, talk to me about the JOB. And it is the JOB that the 
American people are concerned about.
    So it is great that we have this discussion, but how would 
you--and I am going to start with Mr. Buckley--how would you 
translate this? Because I think it is the responsibility of 
Congress to demystify these things for the American people so 
we can build the trust amongst them that policy and decisions 
like this are important. But how is it that this is going to 
impact my local manufacturers and those guys that stop by Augie 
& Ray's, how is a family household impacted by this? What kind 
of metrics? Or, I forget who used a term, I thought it was very 
good, what kind of measurements do we have with respect to that 
impact on those individuals that we can translate into 
meaningful policy----
    And I will start with Mr. Buckley.
    Mr. BUCKLEY. Well, I think the first thing you want is a 
positive business environment in the United States and positive 
incentives for investment in the United States. I think one 
agreement, if you are looking for a bipartisan agreement on 
this panel, is that the Camp bill increases the cost of 
domestic business, capital, and in the long run it is a 
negative for investment in the United States.
    Now, it has a particularly large impact on capital-
intensive industries, largely manufacturing. When people on 
this panel say it increases the cost of capital, they are 
talking about the average cost of capital. It doesn't increase 
the cost of capital much for financial services businesses 
because they do not utilize research and development expensing 
or accelerated depreciation.
    It will have a particularly adverse impact on those 
segments of our economy that utilize those incentives. They 
will see the biggest increase after cost of capital. And it is 
those types of jobs that I believe are necessary for middle-
class growth and income. And it is those types of investments, 
and I would say investments in human capital as well, that are 
necessary for the United States to be productive or competitive 
in an economy that has worldwide flows of capital.
    Mr. LARSON. Isn't this the same problem that we are faced 
with and other cognizance that the full committee has with 
trade over this same issue? It is a global economy, and yet 
this distrust at home amongst individuals over the fact that it 
is easier for jobs to go overseas, and we get left out in the 
process. And manufacturing seems to be depart and goes where 
the lowest common denominator, in this case labor is, so for 
reasons of profitability. You suggested earlier that we need to 
have incentives to be here. Do the rest of the panelists agree 
with that, do you think?
    Mr. DIAMOND. I agree that we need to have incentives. I 
agree with most of what Mr. Buckley just said. On the topic of 
dynamic analysis, I think there are measures in the models that 
would be useful, and we need to look beyond strictly looking at 
GDP. And Mr. Hodge referenced this earlier, is you can have a 
positive GDP response when capital is declining, and so the GDP 
response is purely showing that people are working harder. But 
people like to consume both goods and leisure, so if increases 
in GDP come only from increased hours at work and possibly 
lower wages as demand and supply in the models equilibrate, 
that would be a bad thing.
    In my model, I mean, you can look at employment, at wages, 
you can actually look at welfare, so you could see, and welfare 
would be a measure that is based on how much consumption do you 
have both in terms of consumption goods and in leisure time, 
and then we can measure this theoretical version of welfare. 
And going back to Dr. Holtz-Eakin's point, this isn't a 
projection that is meant to say this is exactly the right 
number. These are meant to compare alternative proposals so 
that we can reach and manage the U.S. economy to the highest 
potential growth path.
    Chairman TIBERI. The gentleman's time has expired, but 
anyone else want to comment? Mr. Hodge, you want to comment?
    Mr. HODGE. Just very quickly. I think getting to your point 
on how tax reform can benefit the average person, you can see 
that in dynamic analysis. For instance, when we analyzed on a 
dynamic basis bonus expensing, if you look at that, the 
distributional effects on a static basis, it shows that average 
people don't benefit at all. But when you look at it on a 
dynamic basis, after those economic effects have flowed through 
to pretax incomes, you see that the incomes of everybody have 
grown by about 2 percent.
    That is the real benefit of a dynamic analysis, especially 
on a distributional basis. You get to see the effects on real 
people after the economic consequences have flowed through to 
their wages.
    Chairman TIBERI. Mr. Holtz-Eakin.
    Mr. HOLTZ-EAKIN. I think if you are talking to your 
constituents, you can say, look, we have three problems that we 
know about. We have too few people working. The people who have 
jobs are not getting raises, income is not going up. And we are 
at a disadvantage in the global economy, our competition is not 
fair.
    So you could fix some of that with trade, but if you are 
just talking on tax policy, you can say, look, here is a 
proposal that the dynamic analysis says improves GDP growth. 
What does that mean? That means initially more people are 
working. You can produce more because more people work. That is 
a jobs problem. Eventually, everyone who wants to work is back 
at work, and GDP can only go up by making them more productive 
and generating more income. That means they are getting raises. 
That is good.
    And some of these proposals would actually level the 
playing field between U.S. and international global 
competitors. That would be great for purposes of the location 
of activity in the United States. So this is about getting 
jobs, getting raises, and keeping our companies here, and that 
is what it is about.
    Chairman TIBERI. Very good. Thank you. The gentleman's time 
has expired.
    Mr. Marchant is recognized for 5 minutes.
    Mr. MARCHANT. Thank you, Mr. Chairman.
    Several of you have recommended changes to the discussion 
draft, and in each case you have argued that the tradeoff 
between rate reduction and cost recovery is difficult. There 
are several temporary tax policies that are designed to speed 
up cost recovery, but which Congress only extends for short 
periods of times and often retroactively. The House has 
recently voted to make two of these, bonus depreciation and 
Section 179 small business expensing, permanent without 
offsetting them with higher taxes elsewhere.
    First, do you think we should assume these policies are 
permanent for purposes of defining revenue neutral and 
distributionality neutral tax reform? Mr. Diamond.
    Mr. DIAMOND. I actually find that a hard question to 
answer, so I will speak specifically to bonus depreciation. The 
effects of bonus depreciation are much different whether it is 
passed on a permanent basis or a temporary basis. If people 
think bonus depreciation is going to be temporary, it could 
cause firms to invest in the window and then would lead to 
decreased investment outside of the window; whereas, if bonus 
depreciation is permanent, you would have a more constant 
rising up of investment. And so over a time path, we get very 
different effects.
    So I am not sure how we should make that assumption. I 
think it is going to be proposal by proposal we would have to 
think about that differently. But for bonus depreciation, I 
think it is a pretty complex proposal to look at.
    Mr. HOLTZ-EAKIN. I will just repeat what I said earlier, 
which is for constructing baselines I think you should have 
equal treatment, and the current treatment is unequal. You 
could fix that by having the tax law sunset and the spending 
program sunset, or you could fix that by having current policy 
extended on both sides. It is my judgment that again and again 
we have done Section 179, we have done bonus depreciation, it 
is a sensible assumption to treat those as permanent in the 
baseline until the Congress behaves differently.
    Mr. DUBAY. I agree with Mr. Holtz-Eakin. I think we should 
be looking at these as permanent policy. There is a question at 
some point. At some point, all these policies were put into 
place with an expiration, so they were temporary at one time or 
another, but once Congress extends them one or two times, it is 
subjective as to what criteria you use, but once you have 
extended them a couple of times, at that point you should 
assume that they are permanent. It has a great benefit to 
having a consistent baseline everyone can agree on.
    So one of the silver linings from the fiscal cliff tax 
hikes from last year, we have a much closer current law and 
current policy baseline. And I think we should be looking at 
the current policy baseline for revenue to continue that 
process of getting all on the same page.
    Mr. MARCHANT. Let me ask a follow-up question on this 
before I hear from the rest of you. How would including these 
permanent versions of these policies as part of the Tax Reform 
Act of 2014, without the need to offset them with higher taxes 
elsewhere, increase the magnitude of economic growth inside of 
that reform----
    Mr. DIAMOND. So for bonus depreciation, JCT actually 
provided a dynamic analysis in a committee hearing, and so they 
found that bonus depreciation would increase GDP by two-tenths 
of a percent. So that would be double the----
    Mr. HODGE. I think they also found that it raised revenue.
    Mr. DIAMOND. It raised revenue. Yeah, it increased the 
capital stock by 0.6 to 1 percent.
    Mr. HODGE. Paid for itself.
    Mr. DIAMOND. So, I mean, it would be substantial, 
especially considering the size of the policy, when you are 
talking a 0.2 percent increase in GDP for a policy that has a 
relatively small revenue impact.
    Mr. MARCHANT. Mr. Chairman, one last question.
    In countries such as Canada that over the years have 
lowered their corporate tax rate, and other countries that 
have, have they used a dynamic score, have they used a static 
score, or have they used projected surpluses in revenue to use 
up to pay for those----
    Mr. HODGE. Every country has done it a little differently, 
Congressman. Canada has been just cutting their corporate tax 
rate with hardly any offsets against those rate cuts. In fact, 
they have seen corporate tax revenue stay very steady 
throughout the entire period of time, even during some of the 
recessionary period, and largely because of income shifting. 
They are benefitting from income shifting in propping up their 
corporate tax collections.
    A country like Slovakia is a very interesting case. When 
they passed a flat tax more than a decade ago, they sought 
analysis, dynamic analysis, from about seven several different 
parties, including like the IMF, World Bank, local 
universities, and then their own treasury. And then they found 
one that they felt was probably more realistic, somewhere in 
the middle.
    I think that is a pretty good model. Let's look at outside, 
have Mr. Diamond, have Tax Foundation, have others do an 
analysis and then compare them. I think that is a fairly 
reasonable way of looking at what the economics profession is 
doing.
    The British Treasury just did a dynamic analysis of their 
corporate tax rate cuts and found that it produced substantial 
benefits and increased revenues as a result. So I think this is 
where the economics profession is moving, and I think it is 
time that we did the same.
    Chairman TIBERI. The gentleman's time has expired.
    Ms. Sanchez is recognized for 5 minutes.
    Ms. SANCHEZ. Thank you, Mr. Chairman.
    And thank you to all of our witnesses for joining us today.
    Before I get into my questions, I have to say that I am a 
bit disappointed by the fact that JCT, who are the people who 
did the official nonpartisan dynamic scoring for the Republican 
tax draft, were not invited to be here on the panel today to 
discuss their work.
    And I also hope that this is not the last of our 
discussions about the desperate need for tax reform at the 
Federal level, because every day that the Congress waits to do 
tax reform is another day that we are falling further and 
further behind other jurisdictions who understand the need to 
reform.
    I certainly don't purport to agree with all of the 
provisions in the Republican tax reform draft, and that is a 
draft that has not gotten a lot of warm embrace from its own 
caucus, but I do believe that that discussion draft deserves 
some discussion, and very thoughtful and deliberative 
discussion, about the substance of the bill itself because we 
have really not had that in this committee. Today we are here 
to talk about economic modeling.
    So because we are here today to talk about the economic 
modeling, Mr. Buckley, I am hoping that you can explore some of 
the assumptions that go into this model. For example, some of 
the models that have been discussed assume that the permanent 
debt-to-GDP ratio is flat or that consumers make the perfect 
economic decision they ever will encounter in their lives, or 
that every person who wants a job can have a job. And what do 
you think the possible effects of making those assumptions that 
exist in these modelings, what do you think the effects of that 
are ultimately?
    Mr. BUCKLEY. Well, I think the effects are that the model 
results are not necessarily very predictive of what would occur 
in the real world, but I think it is important to understand on 
the assumption of GDP, stability of debt to GDP, these models, 
most of the models simply will not project a result unless you 
fix the long-term budget situation in the United States. There 
is no positive impact from these policies unless you do that. 
And the modelers' choice of assumption makes a very big 
difference in the models' results, assuming reductions in 
entitlement benefits give you the biggest long-term growth.
    Ms. SANCHEZ. It was stated earlier that the models are not 
supposed to reflect reality, but why can we not inject a little 
bit of reality into some of these models?
    Mr. BUCKLEY. Well, let me take this opportunity to praise 
what the Joint Committee staff did in its model, because it did 
model reality. It modeled the existing economy with temporary 
substantial unemployment. It did model the current unstable 
long-term budget situation. It didn't assume that we did it. It 
modeled a situation where it has been criticized that people 
are myopic. I think it is fairly reflective of our ability to 
predict the future.
    So it did make a very good faith effort to model. I may 
disagree with the underlying theory of it, but it did, and it 
showed very modest increases in growth. And the modest 
increases in growth all come because of the individual tax 
reductions. The net effect of the business changes is negative.
    Ms. SANCHEZ. Thank you.
    I am sure that all our panelists today, the tax analysis 
departments of all your organizations probably did dynamic 
analysis of the 2001 and 2003 tax cuts. Is that correct? And a 
simple yes-or-no answer will suffice. No? Mr. Holtz, no.
    Mr. DIAMOND. I was at the Joint Committee on Taxation at 
the time.
    Ms. SANCHEZ. Okay.
    Mr. DIAMOND. Yes, we did.
    Mr. HOLTZ-EAKIN. My experience with that was at the CBO. We 
did a macroeconomic analysis of the President's budget, which 
included the 2003 tax provisions.
    Mr. DUBAY. I was not at the organization then.
    Ms. SANCHEZ. Okay.
    Mr. HODGE. No, the Tax Foundation didn't do that at that 
time.
    Ms. SANCHEZ. Mr. Foster----
    Mr. FOSTER. I was not with the chamber at the time.
    Ms. SANCHEZ. Okay.
    Mr. Buckley, do you think that dynamic growth projections 
that were done for the 2001 tax cuts would have likely shown a 
tremendous amount of growth potential like the analysis that we 
see today----
    Mr. BUCKLEY. I think if you used the conventional supply-
side models, you would have seen a much larger growth response 
because they were net reductions in tax. The Camp bill is 
revenue neutral, so these models can't show a big increase in 
long-term growth because you are just moving liability around. 
In 2001, those were substantial tax cuts, and the way these 
models work, it would show big economic growth.
    Ms. SANCHEZ. It would show big economic growth, but how 
does that compare to the actual economic state of the U.S. in 
the 2000s, which, I might add, were a result of two unfunded 
wars, an economic crisis in our financial sector, a tanking 
housing sector, trillions more in debt from an unpaid Medicare 
Part D program, and of course, over a trillion in un-offset tax 
cuts----
    Chairman TIBERI. The gentlelady's time has expired. You may 
answer quickly. We could have a debate.
    Mr. BUCKLEY. Her question answered itself. The results were 
not positive.
    Chairman TIBERI. Thank you, Mr. Buckley.
    Ms. SANCHEZ. Thank you very much.
    Chairman TIBERI. Mr. Young is recognized for 5 minutes.
    Mr. YOUNG. Thank you, Mr. Chairman, for holding this 
hearing. I think this has been quite instructive. I think it is 
very important. I would like to recognize my colleague, Dr. 
Price, who has introduced some legislation in support of 
dynamic scoring and his leadership in this area. I cosponsored 
that legislation as well.
    All of you have done dynamic analysis of the Camp draft. I 
certainly appreciate that and your efforts here.
    I actually think this should be a bipartisan effort. I 
mean, this is about evidence-based policymaking. And I have 
actually discovered, outside of the klieg lights and C-SPAN 
coverage and so forth, that it is a bipartisan initiative to 
dynamically score a range of different policies, from 
immigration reform bills to transportation bills to tax bills.
    I am a member of the No Labels Group, a group of 
conservatives, liberals, and everything in between where we 
periodically convene and talk about issues of the day and try 
and find some common ground. In our last meeting, over coffee, 
roughly a dozen Republican and Democrat Members came together, 
and I think on that day there were eight Democrats, four 
Republicans, there was nearly universal agreement in the need 
to dynamically score all our legislation moving forward.
    Now, we can quibble over the details, but as I see dynamic 
scoring, let me sort of recharacterize this issue very similar 
to the way Mr. Dubay did. We can either be wrong all of the 
time by adopting this artificial static model, and it indeed is 
a model as well, or we can be right some of the time through 
dynamic analysis, and through an iterative process learn from 
our suboptimal models and make all of our assumptions very 
clear to the public and to the best minds in the country and 
the policymakers alike and improve upon those models.
    I would add that we could do static analysis along with 
dynamic analysis and use the static analysis as a baseline and 
then compare which models perform better over a period of 
years, and ultimately perhaps transition into what I suspect 
would be a strictly dynamic analysis environment. I think that 
is the way to go.
    With respect to tax reform specifically, if we consider the 
baseline under a dynamic analysis, fewer offsets would be 
needed to reach budget neutrality. And I think we therefore can 
work in a bipartisan fashion to do things under a dynamically 
analyzed tax reform model. We can extend the R&D credit, 
Section 179, the Earned Income Tax Credit, LIFO, accelerated 
depreciation. We can eliminate regressive taxes like the 
medical device tax.
    Now, do you agree--I will ask Mr. Dubay--if the committee 
were to consider dynamic growth as part of its budget-neutral 
analysis, that the risks of a dynamic score being wrong are 
outweighed, perhaps significantly outweighed, by having extra 
revenue to use on keeping provisions intact, like Section 179 
at the $500,000 level, that inarguably encourage growth? Yes or 
no, if possible.
    Mr. DUBAY. Yes. I look at dynamic scoring as a more 
accurate answer than static scoring. It is not that it is right 
or wrong. It is certainly more accurate. Because as I said in 
my testimony, we know that tax reform will improve economic 
growth. Static scoring doesn't take into account those impacts. 
So we know that it is wrong and we know it is wrong in which 
direction. So we know that dynamic scoring gets us closer to 
the right answer.
    Mr. YOUNG. Right.
    So progress occurs in all realms, science, any area of 
academia, in our economy, in policymaking, through an iterative 
process, or it out to occur through an iterative process, 
through trial and error and improving upon suboptimal results. 
Same thing should apply with respect to tax policymaking.
    Same thing should apply with respect to our analysis. I so 
was encouraged to hear of this notion of microdynamic analysis. 
We need to look at specific provisions of our Tax Code and 
other areas of policy, major ones, as Mr. Holtz-Eakin 
emphasized, in a dynamic way as well. Now, if that requires 
additional staffing at Joint Tax, this is an area where I am 
willing to invest in a few more staffers to ensure that we have 
more optimal growth-oriented policy that will increase the 
number of jobs, increase personal income, and so forth.
    The last thing I would add is just emphasize that this 
doesn't have to, at least initially, be an either/or sort of 
question. We could have both and then transition into the one 
that is proven to work best over a period of years. I would 
start with dynamic analysis for PAYGO purposes.
    But thank you so much for being here. I yield back.
    Chairman TIBERI. Ms. Schwartz is recognized for 5 minutes.
    Ms. SCHWARTZ. Thank you, Mr. Chairman. I appreciate the 
time and the conversation this morning. Just a couple of points 
and then a couple of questions, if I may.
    One is that in this whole discussion about the use of 
dynamic scoring and economic growth, it does seem that--two 
particular points--suggesting that cutting taxes is always good 
for economic growth is kind of the suggestion here a bit. I 
think many of us who do actually think that there is an 
opportunity for us, Republicans and Democrats, to work together 
to lower rates, broaden the base, to really look at tax 
deductions in the way as to what works and what doesn't and 
what stimulates the economy and what doesn't is very real.
    But the notion that tax cuts alone lead to economic growth 
is one that has been disproven time and time again, obviously 
tax cuts for the wealthiest and tax cuts for the wealthiest 
people and the wealthiest corporations. We have been promised 
that. If it worked, we would maybe not be in some of the 
situations we have been in, in the past. So it makes many of us 
very skeptical that that itself is not enough for us to build a 
basis for tax reform. It just isn't.
    The second point is that economic growth really may mean 
different things to different people, and we sort of use that 
terminology as though it is the same thing. Does economic 
growth only mean growth in the GDP, which of course it has to 
be accounted for, but is it just an increase, the wealthy get 
much wealthier, which is kind of where we have been in the last 
decade, or does it also mean that the middle class gets 
wealthier?
    And does that matter to anybody on the panel, is kind of 
the question. Should it matter to us? It is actually what has 
made this country great, by the way, is not just entrepreneurs 
and great corporations, but it is also people with the skills 
and the ability to take these jobs and be paid a fair wage and 
buy products.
    So I think that what we have to look at is to understand 
that we should take into account, and I think Mr. Young said 
this, take into account some of the dynamic scoring you are 
talking about, but it is not the only rationale for what we do. 
We have to look at our ability to meet our obligations in this 
Nation. We have to look at our ability to have the revenues we 
need to educate our people, to be able to compete economically 
in this world, to be able to grow that middle class. And then 
we have to be able to make some of that infrastructure 
transportation investment so in fact we can also compete in the 
global marketplace.
    If we can't do those things, then just creating more wealth 
in this Nation will change who we are in this country, and that 
is one of the questions we need to actually say, are we 
comfortable with that and really a great disparity between the 
very rich and everybody else?
    So here is my question really. As we look at the use of 
dynamic scoring, if we look at economic growth, I was going to 
ask Mr. Buckley, you touched on this, could you speak to how 
that incorporates in any way, if it does, the income inequality 
that has been happening in this country for the last decade, in 
particular, the issue you raised of wages and the competition 
from overseas? If we are really going to be a low-wage country 
with high wealth and low-wage workers, what does that mean to 
our competition overseas? Could you speak to what in some ways, 
I might understand, the narrow definition of economic growth 
without looking at that?
    And my second question, if you would speak to what would be 
the impact on the economy if we actually do not have the 
dollars to make the investments in education, in workforce 
training, and in infrastructure that has been so key to making 
our country such a great economic powerhouse that it might be 
and helps businesses to grow and to locate and to stay here.
    Mr. BUCKLEY. Well, first thing, when you look at the 
models, labor elasticity is higher at upper-income levels, so 
that upper-income individuals have the luxury of working or not 
working, and therefore these models have supported rate 
reductions that are disproportionately at the top. I think that 
is unwise for many reasons.
    Now, the other thing, and here I may differ a little bit, 
or differ a lot, with my other people here. Dynamic scoring is, 
what you are essentially saying, we want to take into account 
the positive impacts of our policy decisions today. That is a 
luxury that we do not permit our corporations to make. They 
make investments, and they make investments with the 
expectation that the return in the future is going to be far in 
excess of the cost of the investment. But they cannot say, our 
investment we are making today is less costly because we 
anticipate income.
    I believe you have to have kind of objective rules for 
budgeting. If the policy choices are wise, the positive impacts 
of those policy choices will flow right into future budget 
projections.
    Chairman TIBERI. The gentlelady's time has expired.
    Ms. SCHWARTZ. Thank you.
    Chairman TIBERI. Mr. Reed is recognized for 5 minutes.
    Mr. REED. Thank you, Mr. Chairman.
    Mr. Hodge, you said something in your testimony, and 
believe it or not, we do listen to the testimony, and I was 
listening to your verbal testimony.
    Mr. HODGE. Well, thank you.
    Mr. REED. And I found it very intriguing. You said 
something about peer review, transparency, making the scoring 
process much more open to review by the public as well as 
people in positions that could comment on that process. I 
wholeheartedly agree. This is a conversation, coming to 
Congress in 2010, I have had repeatedly with different 
individuals in the position that do the scoring.
    And one of the things that was brought back to me and that 
we had a conversation with in response to my request to get the 
black box, to get the magic assumptions, to get the 
calculations was, well, if we give you that information and we 
tell you how we do this, people may manipulate, work around, 
abuse, whatever term you want to use, their proposals, their 
legislation, to get the score that they want. And I was 
actually kind of amazed by that because I am a firm believer in 
transparency and I am a firm believer, if people are going to 
do that, that will stick out as you go through the process.
    Have you ever heard that response from any of the folks, be 
it at the CBO or JCT, in regards to the pushback on disclosing 
these assumptions?
    Mr. HODGE. Well, I will say somewhat cynically that I guess 
it shows that the Joint Committee really does believe tax 
policy changes behavior, that people will work around these 
things. And they are doing it now. I mean, the 10-year budget 
window used to be 5 years, and if you made it 15 years, then 
people would work around that.
    No, transparency is the key here because it is the only way 
of understanding whether or not the tools that the committee is 
using are meeting current standards within the economic 
community. There has to be transparency. I would volunteer to 
come in and demonstrate our model to any one of you. It sits on 
a laptop. We can come in. I will show you what is behind the 
curtain. I will show you all the assumptions. I will show you 
the data that is behind it. I will show you the equations. You 
can pick them apart.
    Mr. REED. The algorithms and everything else.
    Mr. HODGE. We are happy to come in and demonstrate it for 
you. In fact, the committee ought to have that in front of you 
so that during a hearing you can do macroeconomic analysis, 
dynamic analysis during a markup.
    Mr. REED. Now, just so we are clear, Mr. Hodge, I mean, the 
bulk of my conversation generally was not with JCT. It was with 
CBO and CBO representatives on the budget side. And they have 
got the same type of process of assumptions and algorithms and 
things over there.
    Doug, have you ever dealt with that issue? And I think we 
have talked about this before.
    Mr. HOLTZ-EAKIN. Well, I am handicapped by having actually 
done the job.
    Mr. REED. Yeah.
    Mr. HOLTZ-EAKIN. And it is important to recognize that 
scoring is not a model. Scoring is a judgment exercise. I 
scored the Terrorism Risk Insurance Act, first time it was 
passed. There is no model for that. I had to score a death 
benefit for people killed prior to the invasion of Iraq. There 
is no model for that.
    And so while it is useful to have models that incorporate 
the impact of beneficial and bad policy so that you know what 
is going on, in the end this will always be at the CBO and at 
the Joint Committee an act of judgment.
    Now, CBO has in its cost estimates something called basis 
of estimate. It has an obligation to be transparent about how 
it came to its conclusions and to lay out the judgments it 
made. But I think it is a fool's errand to pretend that somehow 
this is a machine and that you can change parameters or inspect 
parameters and know exactly what is going on. You should get 
good staff, respect their judgment.
    It is important to the integrity of the Joint Committee 
that you not micromanage it. And there is a big difference 
between transparency, saying this is the conclusion to which I 
have come, and scientific replicability, and you will never get 
the latter and should not get the latter.
    At CBO, I used proprietary data from large pharmaceutical 
companies to do the Medicare Modernization Act. There is no way 
that should be disclosed to anybody. So that estimate could not 
be replicated. And so it is important to think about this not 
as if it is scientific replicability of an experiment, but 
instead building an institutional culture for good judgments 
informed by all the information that is relevant. Those are two 
very different things.
    Mr. REED. But would you not agree that if the institution 
assumed the wrong assumption or exercised the wrong judgment, 
that would be a problem, that we would not be able to see 
whether or not that was erroneously achieved----
    Mr. HOLTZ-EAKIN. It has to explain how it came to its 
conclusions. I think that is an obligation of both the CBO and 
the Joint Committee. It is in the statute now. They may or may 
not be meeting that obligation successfully. I think that is a 
fair complaint.
    At that point, if you look at how they did it and say, no, 
wait, there is a lot of evidence that the judgment you drew 
here is just incorrect, we have tons of data, they should be 
updating constantly their ability to do that estimate well. I 
have no quibble with that. And I believe that the CBO, while 
not perfect, has tried to do that. If you go to the CBO with 
additional data, if you go to them with additional research, 
they will incorporate that into their view of the scoring 
process.
    Mr. REED. I appreciate it. Thank you for the input.
    Thank you, Mr. Chairman. I yield back.
    Chairman TIBERI. Thank you.
    Mr. Neal, would you like to be recognized----
    Mr. NEAL. Thank you, Mr. Chairman. I thought this was very 
helpful. I thought the panel was very informed. And I hope that 
you might consider down the road scheduling Joint Tax to come 
in and talk about the proposal as well.
    Chairman TIBERI. Certainly will consider it.
    Speaking of Joint Tax, sitting behind Mr. Gerlach the 
entire hearing has been the head of Joint Tax, professionally, 
Tom Barthold.
    Thank you so much for being here. And I particularly want 
to thank you and your macroeconomic team and staff for the 
analysis and all the hard work that you put into the Camp 
draft. We do very much appreciate it.
    And Mr. Neal and I were talking about the witnesses today, 
and I think we both agree, topnotch panel, excellent testimony 
from all of you. It has been a real educational, informative 
discussion. Important to understand the importance of dynamic 
scoring, the limitations of dynamic scoring, and modeling in 
general. I think it always is helpful to help committee members 
as we continue to try to develop tax reform legislation that 
will help increase wages, help create jobs, and help grow our 
economy.
    So it has been a real pleasure to have you all here. We do 
appreciate the time that you took today. And that concludes 
today's panel.
    [Whereupon, at 11:40 a.m., the subcommittee was adjourned.]
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