September 23, 1977
Page 30684
FEEDBACK EFFECTS OF FISCAL POLICY CHANGES
Mr. HATCH. Mr. President, on September 9 during debate over amendments to the second budget resolution fiscal year 1978 a dispute arose between myself and Senators MUSKIE and BELLMON. The dispute concerned whether the CBO's estimates of the effects on tax revenues of tax rate reductions take into account the supply side feedback effects on the tax base of the increased incentives. I maintained that these feedback effects are not taken into account by the econometric models used by CBO, and Mr. MUSKIE maintained that they are taken into account.
Our dispute was noticed by Mr. ROUSSELOT, a member of the Budget Committee in the House of Representatives, who earlier this year addressed this question to CBO and to OMB. Mr. ROUSSELOT's remarks in the House on September 20 clearly indicate that CBO, OMB, and Chase Econometrics have all stated that the supply side feedback effects are not taken into account. I ask unanimous consent to print Mr. ROUSSELOT's remarks in the RECORD at this point.
There being no objection, the remarks were ordered to be printed in the RECORD, as follows:
FEEDBACK EFFECTS OF FISCAL POLICY CHANGES
(Mr. ROUSSELOT asked and was given permission to address the House for 1 minute and to revise and extend his remarks and include extraneous matter.)
Mr. ROUSSELOT. Mr. Speaker, on September 9 a dispute arose on the floor of the Senate in the course of some tax reduction amendments to the second budget resolution, fiscal year 1978. The dispute concerned whether the Congressional Budget Office's estimates of the budgetary effects — that is, the effects on the deficit — of tax rate reductions include the feedback effects of the increased incentives on the tax base.
On February 25, 1977, I addressed this question to Dr. Alice Rivlin, the Director of CBO, and on March 3, 1977, I asked Bert Lance, the Director of the Office of Management and Budget if the econometric models upon which the Government relies for forecasts and economic policy stimulations take into account the feedback effects on tax revenues of the increased incentives that result from tax rate reduction.
The answer is: No, they do not. In her reply of March 11, 1977, Dr. Rivlin stated that—
"The models do tend to neglect the influence of tax rates and other incentives on aggregate supply and capital formation."
OMB's reply under cover of Mr. Lance's letter of March 22, 1977, stated that the Chase, DRI, and Wharton models—
"... do not include any relative price effects from an individual income tax rate reduction — no incentives to work longer, to work harder, to save more, to take greater risk, to be more innovative, etc. Disposable income is increased, which raises consumption, and that is the only direct effect."
The fact is that the supply side feedback effects of tax rate reductions or increases are not taken into account, and this fact is not in dispute. The only feedback effect of tax rate reductions on the tax base and on tax revenues that CBO estimates for changes in personal income tax rates is the effect on disposable income and spending — that is, on demand.
In June 1977 Chase Econometrics themselves stated that—
"These models, which are now used by virtually all economic policymakers are constructed in a way such that they are much better able to simulate the effects of tax policies on aggregate demand than on aggregate supply. Thus the use of these models may have directed policymakers toward those policies which had visible short term effects on aggregate demand without considering their likely intermediate and long term effects on productive capacity."
Mr. Speaker, those of us who have been complaining about the policy bias in the budget resolutions that the Congress has been passing do, after all, know what we are talking about. The country is more likely to prosper if all the members of the House and Senate Budget Committees and the committee staff also become aware of the defects in the tools that they are using to shape the economic policy aspects of the budget resolutions that they bring to the floor.
Mr. HATCH. Mr. President, I do not take any pleasure in the fact that my distinguished colleagues, Mr. MUSKIE and Mr. BELLMON were in error. To the contrary, it concerns me a great deal. We live in an economy that is based on incentives. Yet, we make economic policy without regard to the effects it has on incentives. That is like a doctor prescribing medicine without any regard to its effect on the patient. I do not believe it is safe to continue to make fiscal policy without regard to the effect on the economy's level of aggregate supply.
Therefore, I hope the distinguished chairman of the Senate Budget Committee and the distinguished ranking minority member of the committee will interpret my remarks here today as a good will plea that we learn to understand better the effects of policy alternatives on the economy. It is not our dispute that is important, but our cooperation in forging an economic policy that makes possible high levels of employment, a stable price level, adequate tax revenues for legitimate public expenditures, and prosperity for all Americans.