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Contract Out The Congressional Budget Office

By Lewis K. Uhler and Peter J. Ferrara

As we approach Congressional consideration of major tax reform, we must be wary of an enemy of our own making: the number crunchers at the Congressional Budget Office (CBO) whose Budget Act and other calculation and estimate powers can make or break policy proposals (witness CBO’s recent “Obamacare Repeal / Replacement” calculations of the number of Americans who would lose health insurance and its impact on the Republican legislation).

A tax reform case in point was President Reagan’s ’81 tax cuts which were scored by CBO to reduce federal revenues.  But, as former Senator Phil Gramm and Michael Solon explained in the Wall Street Journal on April 20, real economic growth averaged just 2.5% from 1974 until 1980. But after the first round of Reagan’s tax rate cuts were phased in by 1983, real growth averaged 4.6% during the rest of his Presidency. Gramm and Solon write “[F]ederal revenues grew at double digit rates in four of [Reagan’s] last six years in office.” 

But President Obama did exactly the opposite in response to the recession he inherited. He raised rates for virtually all major federal taxes.  In 2013, Obama insisted on reversing the Bush tax cuts for the highest income earners, raising their income tax rate from 35% to at least 39.6%, and effectively to over 42% counting all the new Obamacare provisions.

CBO estimated that would increase federal revenues by $650 billion over 10 years.  But CBO was later forced to revise that forecast when revenue declined by $4.2 trillion, over 5 times as much, due to Obama’s weak economic growth, Gramm and Solon reported: “Economic growth during the Obama years averaged an astonishingly low 1.47%, as compared to the 3.4% average throughout all of the postwar booms and busts before 2009.”

CBO’s past revenue calculation miscues suggest that we should question the CBO estimates Trump’s tax reform as a net revenue loser. “Lifting the economy from CBO’s post-Obama projection of 1.8% growth to the 3.4% postwar average would generate $4.6 trillion of additional federal revenues over the next 10 years,” Gramm and Solon report.  Recognizing that would make tax increases like the border adjustment tax completely unnecessary.

Another tax cut that CBO has consistently miscalculated is the capital gains tax rate.  When that rate was 15% it produced more revenue than at higher rates.  Mark Bloomfield and Oscar S. Pollock have calculated that cutting the capital gains tax rate to 15% would raise nearly a trillion over 10 years, based on the experience of just such a rate cut in 2003. When the capital gains rate was raised back to 20% in 2009, and later to the 23.8% rate of today, capital gains revenues declined.  CBO misestimated the effects of those rate changes also, getting the direction of revenues wrong in both cases.   

During the 2012 Presidential campaign, Newt Gingrich proposed fundamental CBO reforms that would correct these CBO failures.  He proposed contracting out CBO’s functions to four more economic forecasting firms. Then each year, the worst of the 5 forecasters, including CBO itself, would be dropped and replaced altogether by a new contractor.

Subjecting CBO to such competition is the only way to correct the fundamental errors of the organization, which have persisted for over 40 years now.

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