July 24, 1997

Administration's Own Analysis Shows No Tax Cut Explosion

First the tax cuts must be fiscally responsible by avoiding an explosion in revenue costs in later years. . . Neither bill meets these tests."

--- July 3, 1997, letter from Secretary Rubin to Congress

Ever since Congress began crafting the tax cut agreed to by President Clinton on May 2, the Department of Treasury has tried to conjure up reasons to oppose it. As everyone now knows, Treasury's number crunchers have resorted to phony income calculations that artificially inflate income -- adding in such things as "imputed rent" -- in order to claim -- falsely -- that a disproportionate share of benefits go to the nation's top earners.

Another canard has been the charge that the tax cuts will grow to unacceptable levels, and thus explode the deficit after 2002. However, this time even phony analysis could not substantiate the charge. Unwilling to let the truth stand in the way of politics, Treasury simply lied.

Treasury officials incessantly have been attacking congressional proposals to lower the capital gains rate to 20 percent (and to 10 percent for those below the 28-percent rate). Yet, for more than two months they did not produce a single estimate of their own to verify their exploding-deficit claims. Finally, this week, we see that their estimate shows that neither bill "costs" anything in the first years, 1997-2002.

As a July 21, 1997, letter from the Acting Assistant Secretary for Tax Policy to the Finance Committee indicates:

• The capital gains tax cut (to which Treasury has been attributing the most "cost") actually raises -- not loses -- money in 1997-2002: the Senate bill raises $7 billion and the House bill raises $5.7 billion, according to the Treasury's own estimate. (Congress's official estimator, the Joint Committee on Taxation (JCT), said the Senate bill will cost $2 billion and the House bill will raise $2.7 billion over the same time.)
• The 10-year costs Treasury claims "explode" in the out-years are actually lower under Treasury's estimate than under Congress's: the Senate bill raises $5.5 billion and the House bill costs just $10.3 billion, according to the Treasury's own estimate. (JCT said the Senate bill costs $22.8 billion over 1997-2007, while the House bill costs $34.9 billion.)

Yet when the Treasury sought an estimate from which to manufacture its claims about the cost of the provisions in even later years, it did not use its own lower estimate but the higher ones calculated by Congress's estimator. They ignored their own analysis that showed the beneficial effects of a capital gains cut, and simply pasted their political conclusions over the facts. In short, Treasury lied about the impact of Congress's capital gains tax provision.

What Exploding Deficits?

Faced with the unpleasant truth that they kept hidden for over two months, Treasury officials sought to manufacture "facts" to suit their political purposes. Since any long-term revenue estimates are notoriously suspect -- with capital gains being particularly so because of their highly variable nature -- there are no credible estimates beyond ten years. Even Treasury would not produce one.

With a credible long-term estimate not possible, Treasury settled for an incredible one. According to the July 21 letter: "Figures for 2008-2017 are not revenue estimates, but are linear extrapolations based on the average change in cost of the listed provisions between 2004 and 2007." Succinctly, Treasury simply inflated actual estimates over another ten years.

Yet Treasury did not apply this specious strategy of "linear extrapolations" to their own estimates, which revealed much lower figures for Congress's provisions.

Exploding Rhetoric, Not Exploding Deficits

Though Treasury wants mightily to produce a pleasing political result for liberal tax cut critics, the only thing its analysis revealed to be "exploding" is its rhetoric -- not federal deficits.

• Treasury has been charging for more than two months that Congress's capital gains plans explode the deficit.
• Yet Treasury analysis shows that the cost of these provisions is either nonexistent in the case of the Senate or $25 billion less in the case of the House than what they have been attacking.
• Undercut by their own analysis and unable to make a credible estimate for any later years, Treasury officials simply inflated estimates they already believed to be inaccurately high in order to try and substantiate their political charges.

Treasury's recent revelation shows their bias against capital gains tax cuts. Unable or unwilling to give a fair analysis, they should recuse themselves now and give the U.S. economy a chance to realize the jobs, growth, savings, and investment that a capital gains reduction will deliver.