Saturday, June 03, 2006

Reich on Taxes, Again

As I have noted before, former Labor Secretary Robert Reich has a way of expressing numbers that is so striking it makes me sit up and want to check the facts myself. Here is what he says at his blog now:
repeal [of the estate tax] would cost the U.S. Treasury $1 trillion in its first ten years. That's about equivalent to what's needed to save Social Security over the next 75 years.
Really? That is amazing.

Let's look a little harder at this and see if we can find some numbers that, at least approximately, back this up.

How much does repeal of the estate tax cost over its first 10 years? According to the Tax Policy Center, immediate repeal would cost about $300 billion from 2006 to 2015. That, however, appears to be an undiscounted number. The present value is probably around $250 billion.

What does it cost to fill the Social Security shortfall over 75 years? This report from the Social Security Administration shows the present value of the 75-year shortfall for OASDI of about $5 trillion.

Hmmm....Those two numbers don't seem "about equivalent" to me. In fact, the second one seems 20 times as big as the first.

Now I may have been unfair to Reich in the above calculations. Perhaps he means a different first ten years, rather than the ten years starting immediately. And maybe he prefers different Social Security projections than those I have cited. And maybe he prefers a different discounting convention (although I would insist that he treat the two numbers in a parallel fashion). I would not defend the factor of 20 to the death, or even to a brush burn. I can imagine whittling that number down to a factor of 10 or even 5. But can someone get these two numbers within the same ballpark? I doubt it.

Lastly, let me note that the comparison here is silly. Why compare a 75-year shortfall to a 10-year revenue loss? There is no reason to, other than for dramatic effect. But policy wonks are supposed to have less license in making up their drama than playwrights.

Extra comments for econ nerds and data geeks:

1. All this, of course, assumes static scoring. The footnote at the Tax Policy Center says: "Change in estate tax liability is a static estimate that does not include behavioral response." If you believe, as I do, that taxes on capital reduce capital accumulation and economic growth, the lost revenue from estate tax repeal would be even smaller. (For a related recent report, click here.) But I wouldn't fault Reich for not agreeing with me on this issue: The evidence is such that reasonable people can disagree.

2. I suspect that Reich got his $1 trillion figure for estate tax repeal from the Center on Budget and Policy Priorities, which says "Permanently repealing the estate tax would cost roughly $1 trillion over the first ten years of extension, 2012-2021. This cost includes $776 billion in lost revenue and $213 billion in increased interest payments on the national debt."

The 10-year period is different than the one I used, but more interesting is the treatment of interest. The present value of that $776 billion revenue loss would probably be around $400 to $500 billion. Instead of this calculation, however, the CBPP adds the increased interest to the lost revenue; in essence, they are calculating not a present value but a future value. That is, the lost revenue is expressed from the vantage point of 2021. This is an odd metric and certainly not comparable to those typically used to measure the Social Security shortfall.