About the Tax Analysis Center
Welcome by Larry Kotlikoff
Welcome to the Tax Analysis Center.
The studies you will find at this website rely on models that, in some cases, took decades to develop. For example, Economic Security Planner – the lifetime personal financial planning program that my company, Economic Security Planning, Inc. developed – will be used to study lifetime tax fairness as well as measure marginal effective taxes on working and saving. Work on this model began over 25 years ago. Its development for research purposes was either directly or indirectly funded by Boston University, the National Institute of Aging (part of the National Institute for Health or HIH), and the National Bureau of Economic Research.
The modern extensions of the Auerbach-Kotlikoff dynamic life-cycle simulation model will also be a workhorse of Center’s dynamic tax analysis. Work on the model began in 1979 and has been nurtured by a long-list of sponsors, including UCLA, Yale University, Boston University, Harvard University, the University of Pennsylvania, UC Berkeley, the University of Würzburg, the University of Ulm, the Organization for Economic Develpment and Cooperation, the World Bank, the International Monetary fund, the National Bureau of Economic Research, the Gaidar Institute, and others.
The Center’s current sponsor is the National Center for Policy Analysis (NCPA):
The National Center for Policy Analysis (NCPA) is a nonprofit, nonpartisan public policy research organization, established in 1983. Our goal is to develop and promote private, free-market alternatives to government regulation and control, solving problems by relying on the strength of the competitive, entrepreneurial private sector. We bring together the best and brightest minds to tackle the country’s most difficult public policy problems — in health care, taxes, retirement, education, energy and the environment. In doing so, we propose reforms that liberate consumers, workers, entrepreneurs and the power of the marketplace.
The Tax Analysis Center leans neither to the left nor to the right. It is based on apolitical, unbiased, academically well grounded research. In soliciting funds for the center, we have approached many people and organizations who have a self-interest in the tax system, including those who wish their taxes were much lower. In fact, it is hard to find an individual or organization that doesn’t have a financial interest in the tax system. However, every past and future donor is put on alert: their vested interest will neither affect our research nor our findings.
Again, welcome to the Tax Analysis Center and please help spread the word about its work and mission.
Dynamic, Not Static Analysis
One of the biggest concerns with what currently passes for tax analysis in Washington is the static nature of the studies. When it comes to considering tax fairness and tax incentives, static analysis treats households as living just in the current year, with this year’s taxes being compared to this year’s income. Moreover, all generations are lumped together, so that someone who is now age 80 and who paid taxes throughout her entire life is being compared with someone who is 25 and just starting to work and pay taxes.
With these blinders, the 80-year-old receives no recognition for all the taxes she paid in the past, and the 25 year-old receives no credit for all the taxes she will pay in the future. The result of mixing “apples and oranges” in this manner is the inability to get a clear picture of either tax equity within or across generations.
By employing dynamic analysis, the Tax Analysis Center will explicitly take account of the fact that people live for more than one year and that their years of birth matter. Accordingly, it will examine tax fairness on a cohort-specific basis and measure fairness within a cohort by comparing remaining lifetime net taxes (taxes paid net of transfer payments received) as a share of remaining lifetime resources. Remaining lifetime net taxes are the present value (the value in the present) of all of one’s projected future net tax payments. Remaining lifetime resources are the sum of one’s current net wealth plus one’s human wealth (the present value of remaining future labor earnings).
Static as opposed to across-time/dynamic analysis also produces biased descriptions of a country’s fiscal sustainability. The size of a country’s official debt is the standard measure used to gauge if the country can continue to pay its bills. But what is included in official debt is what a country chooses to put on its books. It leaves out all the future spending commitments as well as all the future taxes available to help meet those future spending commitments. As such, the official debt can produce a grossly misleading picture of a country’s finances.
Fiscal Gap and Generational Accounting
The Tax Analysis Center will measure and analyze the fiscal gaps of nations — the present value difference between all projected future expenditures (not just those classified as official obligations) and all projected future taxes.
Fiscal gap analysis has been endorsed by a Who’s Who of economists, including 15 Nobel Prize Winners, as can be seen at www.theinformact.org. These economists are effectively saying that all government obligations, whether labelled “official/legal” or not represent economic obligations and must be put on the books. The economists also recognize the huge gulf separating official debts and fiscal gaps in the leading developed countries. In the U.S. in 2013, for example, the fiscal gap stood at $205 trillion, whereas official debt in the hands of the public was only $12 trillion. The Tax Analysis Center will also do generational accounting, which calculates the implications for today’s and tomorrow’s children if current adult generations leave them to pay the entire fiscal gap.
Dynamic Tax and Spending Analysis
A third focus of the Tax Analysis Center will be the macroeconomic impact through time of fiscal reforms. Economists have spent decades developing highly detailed dynamic simulation models that are capable of showing us how the economy would likely respond in the short-, medium-, and long-terms to tax hikes, changes in the tax structure, increased government consumption, changes in Social Security and other transfer programs, corporate tax reform — you name it. Unfortunately, dynamic models that might help us think through the scoring of specific tax and spending proposals have, like so much else in our policy debate, become politicized.
Everyone recognizes that the fiscal system feeds back on the economy and vice versa. But those on the left are wary of models developed by those on the right, and those on the right worry about models developed by those on the left. Such worries are fully justified, but biasing our findings based on either extreme supply- or demand-side assumption is decidedly not part of the Tax Analysis Center’s agenda.
Instead, the Tax Analysis Center will study the economy’s fiscal feedback effects based on standard dynamic, life-cycle simulation models that imbed no extreme behavioral assumptions.