Citizens for Tax Justice

For release on July 3, 1997

CTJ Pegs Cost of House-Passed Tax Bill At Double "Official" Estimates

New Estimates of Cost of Capital Gains Tax Cuts and Corporate Tax Breaks Bring Total Cost to $173 Billion Over Five Years and $472 Billion Over Ten Years


Citizens for Tax Justice today released new estimates of the cost of the House-passed 1997 tax plan that peg the likely cost of the bill at $173 billion over five years and $472 billion over ten years. CTJ’s cost estimates are approximately double the “official” estimates and indicate that the congressional tax plan fails by a large margin to stay within the budget targets agreed upon by President Clinton and congressional leaders even over the next five years.

"Many analysts have correctly pointed out that the congressional tax plan will explode in cost over the long term," noted CTJ director Robert S. McIntyre. "Our analysis shows that the tax plan is far more costly than advertised in the short term as well."

Summary of Re-estimating Methodology:

1. In the case of capital gains (profits from selling stocks, investment real estate, etc.), CTJ’s methodology for re-estimating the cost of the House plan is outlined in detail in a new paper, "How Much Will the Capital Gains Tax Cuts in the House-Passed 1997 Tax Plan Really Cost?" (July 1997). The new paper is an update of a previous analysis by John O’Hare, the Joint Committee on Taxation’s former chief capital gains estimator (now with the Urban Institute). The new paper notes that congressional estimators apparently assumed about a $1.4 trillion increase in sales of stocks, bonds real estate and other capital assets over the next ten years in response to the tax cuts, almost 50% more that the level of "realizations" expected under current tax law. Coupled with other questionable assumptions, this led the official estimators to assume that 90% of the ten-year cost of the House capital gains tax cuts would be offset by new taxes on increased asset sales. Recent academic research, however, strongly suggests a much lower response to capital gains tax cuts, indeed that the actual "permanent elasticity is not significantly different from zero."1 The analysis conducted by CTJ takes a middle-ground approach, predicting that approximately one-third of the static revenue loss would be recouped in the form of higher realizations over the budget horizon. While this behavioral response is lower than that used by Congress, CTJ’s estimated response remains significantly higher than what current research suggests.

2. The corporate Alternative Minimum Tax is designed to assure that profitable companies pay at least some income tax no matter how many tax preferences they may enjoy. The House bill proposes what amounts to back-door repeal of most of the tax. In its estimates of the cost of this provision, CTJ took into account not only reduced revenue from the minimum tax itself directly, but also the likely reduction in corporate tax payments under the regular corporate income tax due to increased use of tax breaks that are now not taken advantage of due to the existence of the minimum tax.

3. In the case of the proposed new rules governing independent contractors, a May 1997 CTJ analysis of IRS “tax gap” data finds that for every 1 million workers that might switch from employee to independent-contractor status, the federal government would lose approximately four billion dollars a year in income and payroll taxes. Thus, the official estimated cost of the independent contractor provisions in the House tax bill of about $200 million a year would imply an assumption that only 50,000 workers will switch if the bill is enacted. CTJ instead conservatively estimated that a million workers would eventually switch to independent contractor status, at a cost of about $2 billion annually.

Click Here for A table detailing CTJ's re-estimates of the cost of the House tax plan.

Click Here to See A copy of "How Much Will the Capital Gains Tax Cuts in the House-Passed 1997 Tax Plan Really Cost?"

Citizens for Tax Justice is a non-partisan tax policy research group based in Washington, DC.

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1. Leonard E. Burman and William C. Randolph, “Measuring Permanent Responses to Capital-Gains Tax Changes in Panel Data,” The American Economic Review, Sept. 1994. See also Jane G. Gravelle, “Capital Gains Tax Proposals,” Testimony before the Senate Finance Committee, Feb. 15, 1995 (“the revenue cost of a fifty percent exclusion . . . may be twice as large as [previously] estimated”).