In considering whether to pass a bill, Congress relies on the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO) to estimate, or “score,” the effects the proposed legislation would have on tax revenues and government spending. The problem is that the estimates provided by these agencies are becoming more and more wildly erroneous.
For example, Congress cut the capital gains tax rate from 20 percent to 15 percent in 2003. The JCT estimated that this cut would reduce revenue by $5.4 billion from 2003 to 2006. But capital gains revenues instead rose by $133 billion during those years.
CBO made similar errors. It projected that with the 2003 tax-rate cut, capital gains tax revenues for the period from 2003 to 2006 would be $197 billion. But the actual capital gains revenues were $330 billion, reflecting an error of 68 percent.
The CBO has also recently made wild errors in estimating total federal revenues. For 2004–2006, CBO underestimated federal revenues by an average of $85 billion a year, or a total of $255 billion over that three-year period. Of course, that has resulted in similarly large errors in estimating the budget deficits year after year.
The reason for these errors: CBO failed to accurately estimate the effects of the Bush tax cuts during those years. While the tax cuts were projected to lose $382.6 billion, higher economic growth—a direct result of the cuts—produced $196 billion in unestimated additional revenue. So the net revenue loss from the tax cuts was only $186.6 billion, less than half the official estimate.
The errors don’t stop with revenues. CBO estimated that the average premium for seniors for private sector coverage under the Medicare Part D prescription drug plan would be $38 per month. But in the first year it was $24, and this year it will be $22, reflecting a 72 percent error. The cost to the government for this program is now projected to be $136 billion less than CBO originally estimated for the period from 2007, an error of 26 percent.
Given the JCT’s and CBO’s wildly erroneous scoring efforts, we have to ask two questions:
- Why does anyone still believe them?
- And why don’t they adopt a scoring methodology that is more accurate?