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The Congressional Budget Office's Skewed Numbers


Economic Viewpoint

THE CONGRESSIONAL BUDGET OFFICE'S SKEWED NUMBERS

The Congressional Budget Office (CBO) is described in the media as nonpartisan. Such a designation permits the Democratic leadership on Capitol Hill to pretend that the cbo's economic estimates are objective. Many of the CBO's numbers are sound, but the closer they get to disputed policies, the more the numbers are slanted in favor of the Democrats who control the office.

One good example is the CBO's estimate of capital-gains income. In response to questions from Representative Richard Armey (R-Tex.), a professional economist who could not be bamboozled, the CBO recently conceded that its estimate of capital-gains income for 1990 had been off by more than 100%. The CBO had projected that capital-gains income in 1990 would be $134 billion higher than it was.

This is important because the CBO's amazingly overinflated estimate was used by the Joint Taxation Committee in reckoning its estimate of the revenue loss from cutting the capital-gains tax rate. The overestimate of capital-gains income more than doubled the estimated revenue losses of the popular Archer-Jenkins bill, leading to the 1990 death of this House-passed measure in the Senate for budget reasons.

The same overestimate is the basis of opposition to President Bush's present proposal to cut the capital-gains tax, on the grounds that it would cause too much revenue to be lost and violate the budget agreement.

Because the methodology used by the Joint Tax Committee ignores the disincentive effects of taxation, it is so out of date and behind the times that, at its best, the committee's work is useless. Often, however, it is at its worst. Then, the Joint Tax Committee panders to an income-leveling ideology that opposes economic growth incentives. The committee believes that the U.S. needs more equality in the distribution of income and, thereby, opposes growth incentives that allow the rich to earn more income along with everyone else.

For example, the committee concedes that a lower capital-gains tax rate has an unlocking effect, resulting in greater realizations of capital-gains income as investors become more willing to sell. The committee now provides an estimate of increased tax revenues from the unlocking effect as a partial offset against its estimate of the lost revenues. Yet, when the Joint Tax Committee makes up its distributional tables of who gains from a lower capital-gains tax, it does not count the higher tax revenues from the unlocking effect. It simply ignores them.

Thus, by allocating capital-gains income to the rich but not counting the higher taxes that the rich pay from increased realizations, the committee "proves" that a lower capital-gains tax rate primarily benefits the rich.

Incompetent would be too kind a word to describe this biased methodology, which has contributed to the three-year stagnation of the economy--thus worsening everyone's economic prospects, especially those of the poor.

The CBO's wildly overblown estimate of capital-gains income causes further mischief when used in its annual compilation of family-income data. In 1990 and 1991, the CBO's family-income statistics, known as the "Green Book," were trotted out by critics with a penchant for social engineering to prove that Reagan's policies had made the rich richer and the poor poorer. The CBO then compounded this error by failing to index the cost basis of capital gains for inflation. Purely nominal gains and even losses were added to the overestimate to further inflate the share of real income going to the rich.

When pressed to explain the use of such biased methodology to produce misleading studies, the Joint Tax Committee and the CBO have come up with a dilly of an argument. They assert that the higher taxes paid because of the rise in capital-gains realizations "do not represent an increase in tax burden" because "the choice to realize additional capital gains is a choice by the taxpayer to improve his situation."

CHOICES. With this Alice in Wonderland logic, virtually no tax is part of the tax burden. Income and Social Security taxes don't have to be counted, because the choice to take a job is also a choice by the taxpayer to improve his or her situation. Ditto for corporate, sales, and excise taxes, since the choice to buy a product is "a choice by a taxpayer to improve his situation." This only leaves the estate tax burden, and it falls on the dead. Little wonder liberal Democrats don't understand the tax revolt.

All of economics is about choices. It is because this simple fact escapes the CBO and Joint Tax Committee that they are threats to the economic welfare of the citizens of the U.S. Nothing can be done about these two organizations that block an effective economic policy, because, unlike executive branch agencies or the Federal Reserve, their directors are appointed on the Hill by Democrats behind closed doors by the congressional leadership and are not subject to public oversight and accountability. They are subject only to oversight by the partisan Democratic leadership.Paul Craig Roberts


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