Legislative Process & Economic Modeling: The Journey of a Federal Tax Bill

The Unseen Architects: How Economic Models and Political Will Shape Your Taxes

A deep dive into the intricate, often contentious, journey of a federal tax bill, from a glimmer in a politician's eye to the law of the land.

The federal tax code, a behemoth of regulations and statutes, is a document that touches the lives of every American. It dictates the size of our paychecks, influences business decisions, and underpins the very functions of our government. But how is this colossal structure built and modified? The journey of a federal tax bill is a labyrinthine odyssey through the halls of Congress, a process where political ideology, public pressure, and a little-understood world of complex economic modeling collide. It is a story of power, persuasion, and the perpetual struggle to balance competing interests.

This article will pull back the curtain on this intricate process, exploring the legislative gauntlet a tax bill must navigate and the powerful, often controversial, role of the economic models that attempt to predict its consequences. We will journey from the initial spark of an idea to the final stroke of a presidential pen, examining the key players, the critical debates, and the analytical tools that shape the taxes we pay.

The Legislative Gauntlet: A Step-by-Step Journey

The United States Constitution, in Article I, Section 7, dictates that "All Bills for raising Revenue shall originate in the House of Representatives." This simple clause sets the stage for a legislative process that is both formally structured and intensely political. While the President may propose tax legislation, and often does, the constitutional power to initiate tax law lies solely with the House.

Step 1: The Genesis of a Tax Bill

Ideas for tax legislation can spring from various sources: a presidential administration's policy goals, the campaign promises of a member of Congress, the advocacy of special interest groups, or the recommendations of economists and think tanks. Often, the President's proposals, drafted with the expertise of the Treasury Department and the Internal Revenue Service (IRS), serve as a starting point for major tax reform.

Step 2: The Crucible of the House Ways and Means Committee

Once an idea for a tax bill is formally introduced in the House of Representatives, its first and most crucial stop is the Committee on Ways and Means. This committee, the oldest in Congress, holds the primary jurisdiction over all matters of taxation and revenue. Here, the bill undergoes a rigorous process of examination and debate.

The committee typically holds public hearings where a diverse cast of characters—economists, business leaders, labor representatives, and advocates for various causes—present testimony on the potential impacts of the proposed legislation. These hearings are a critical information-gathering phase, allowing committee members to hear a range of perspectives and build a record for their decisions.

Following the hearings, the committee enters the "markup" phase. This is where the real horse-trading and legislative craftsmanship begin. In a series of intense, often lengthy sessions, committee members debate the bill's provisions and offer amendments. The Joint Committee on Taxation (JCT), a nonpartisan committee of economists, attorneys, and accountants, plays a pivotal, if often behind-the-scenes, role at this stage. The JCT's staff assists in drafting the legislative language, analyzing proposals, and, most importantly, providing revenue estimates for the bill and its various amendments.

The chairman of the Ways and Means Committee often presents a "chairman's mark," a revised version of the bill that serves as the starting point for the markup debate. Amendments are proposed, debated, and voted on, and the JCT provides real-time analysis of their revenue implications. Once the markup is complete, the committee votes on whether to report the bill, with or without amendments, to the full House. If approved, the committee staff, with the assistance of the JCT, prepares a detailed committee report outlining the bill's purpose, provisions, and the committee's reasoning.

Step 3: The House Floor

The bill then moves to the full House of Representatives for consideration. The House Rules Committee sets the parameters for the floor debate, including the amount of time for debate and the types of amendments that can be offered. If the bill passes the House by a simple majority vote, it is then sent to the Senate.

Step 4: The Senate Finance Committee

The Senate's counterpart to the Ways and Means Committee is the powerful Senate Finance Committee. Here, the bill undergoes a similar process of hearings and markup. However, the Senate's rules are generally more flexible than the House's, often allowing for a greater number of amendments. The Finance Committee's markup typically focuses on amending the House-passed bill rather than starting from scratch. The JCT continues to play its crucial advisory role, providing analysis and revenue estimates for the Senate's consideration.

Step 5: The Senate Floor and the Specter of the Filibuster

Once the Finance Committee approves its version of the bill, it proceeds to the full Senate for debate. Here, the legislative process can become significantly more complex due to the Senate's unique rules, most notably the filibuster, which allows a minority of senators to block a vote on a bill. Overcoming a filibuster requires a supermajority of 60 votes.

However, there is a powerful procedural tool that can be used to bypass the filibuster for certain budget-related legislation: reconciliation. Under reconciliation, a bill that primarily deals with spending, revenue, or the federal debt limit can be passed with a simple majority of 51 votes. This process has been used to pass several major tax bills, including the Tax Cuts and Jobs Act of 2017. The use of reconciliation significantly alters the political dynamics, as the majority party does not need to secure bipartisan support to pass its tax agenda.

Step 6: The Conference Committee: Reconciling the Differences

If the Senate passes a version of the tax bill that is different from the House's version, the two chambers must reconcile their differences. This is typically done through a conference committee, a temporary panel composed of members from both the House Ways and Means Committee and the Senate Finance Committee. The conferees, appointed by the leadership of both chambers, negotiate a compromise bill that can pass both the House and the Senate without further amendment. The JCT is once again on hand to provide technical assistance and revenue estimates for the compromise proposals.

Once the conference committee reaches an agreement, it issues a conference report, which includes the final legislative text and an explanation of the compromise. Both the House and the Senate must then vote to approve the conference report.

Step 7: Presidential Action

After a bill has been passed in identical form by both the House and the Senate, it is sent to the President. The President has several options:

Sign the bill into law: This is the most common outcome for a bill that has made it this far.
Veto the bill: The President can reject the bill and send it back to Congress with a veto message. Congress can override the veto with a two-thirds vote in both the House and the Senate, at which point the bill becomes law without the President's signature.
Allow the bill to become law without a signature: If the President takes no action within ten days (excluding Sundays) while Congress is in session, the bill automatically becomes law.

This arduous journey, from its conception to its enactment, is a testament to the checks and balances inherent in the American system of government. It is a process designed to be deliberative, but one that is also intensely political, with each step offering opportunities for negotiation, compromise, and, at times, partisan gridlock.

The Unseen Hand of Economic Models

Beneath the surface of the political wrangling and legislative maneuvering lies a world of complex economic models that exert a profound influence on the shape of a tax bill. These models, developed and maintained by government agencies and private think tanks, are the tools used to predict the future—to forecast the economic and budgetary consequences of proposed tax changes. The "scores" produced by these models are a critical part of the legislative debate, cited by politicians to bolster their arguments and by the media to explain the potential impacts of a bill.

The Official Scorekeepers: JCT and CBO

The two most influential players in the world of tax modeling are the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO). The JCT is the official scorekeeper for all tax legislation, while the CBO provides economic and budget analysis for all proposed legislation. Both are nonpartisan, and their analyses are intended to be objective and based on the best available evidence.

The JCT employs a suite of sophisticated models to analyze tax proposals, including:

Individual Tax Model: A microsimulation model that uses a large sample of tax returns to simulate how changes in tax law would affect individual taxpayers.
Corporate Tax Model: A model that analyzes the impact of tax changes on corporations.
Foreign Tax Model: A model that examines the effects of tax proposals on cross-border investment and income.
Estate and Gift Tax Model: A model that focuses on the taxation of large estates and gifts.
Excise Tax Models: Models designed to analyze the effects of taxes on specific goods like tobacco and gasoline.

The CBO also utilizes a variety of models, including its own capital tax model called "CapTax," to estimate the effects of tax policy on investment and the broader economy.

The Think Tank Analysts

In addition to the official scorekeepers, a number of influential think tanks also produce their own economic analyses of tax proposals. These organizations often have their own proprietary models and can bring different perspectives to the debate. Some of the most prominent think tanks in the tax policy space include:

The Tax Foundation: This organization uses its "Taxes and Growth" (TAG) model, a type of Computable General Equilibrium (CGE) model, to analyze the economic and revenue effects of tax proposals. The Tax Foundation is generally considered to be a right-leaning organization.
The Tax Policy Center (TPC): A joint venture of the Urban Institute and the Brookings Institution, the TPC uses its own microsimulation model to analyze the distributional and revenue effects of tax proposals. The TPC is generally considered to be a center-left organization.
The Penn Wharton Budget Model (PWBM): Housed at the University of Pennsylvania, the PWBM uses a dynamic, overlapping-generations model to analyze the long-term economic and budgetary effects of fiscal policy.
The American Enterprise Institute (AEI): A conservative think tank that often produces research and analysis on tax policy.
The Center on Budget and Policy Priorities (CBPP): A left-leaning think tank that focuses on the impact of fiscal policy on low- and moderate-income families.

The analyses from these think tanks can provide alternative perspectives to the official scores from the JCT and CBO, and they are often cited by policymakers and the media to support different sides of a policy debate.

The Alphabet Soup of Economic Models: A Closer Look

To understand the influence of economic models on tax policy, it's essential to have a basic grasp of the different types of models and what they are designed to do.

Computable General Equilibrium (CGE) Models

CGE models are large-scale, economy-wide models that attempt to capture the complex interrelationships between different sectors of the economy. They are based on the theory of general equilibrium, which posits that in a competitive market economy, prices will adjust to bring supply and demand into balance across all markets simultaneously.

CGE models are particularly useful for analyzing the broad, long-term effects of tax policy on variables like GDP, investment, and employment. They can simulate how a tax change in one sector of the economy will ripple through to other sectors, providing a holistic view of the potential impacts. The Tax Foundation's TAG model is a prominent example of a CGE model used in tax policy analysis.

Microsimulation Models

Microsimulation models, in contrast to the economy-wide focus of CGE models, are built from the ground up, using large datasets of individual households or firms. These models apply the rules of a proposed tax change to each individual record in the dataset to simulate how the change would affect that individual's tax liability and after-tax income.

The strength of microsimulation models lies in their ability to provide detailed distributional analysis—to show how a tax change would affect households at different income levels, of different family types, and in different geographic locations. They are the primary tool used by the JCT and the Tax Policy Center to analyze the "who wins and who loses" from a tax proposal.

Overlapping Generations (OLG) Models

OLG models are a type of dynamic model that is particularly well-suited for analyzing the long-term and intergenerational effects of tax policy. These models explicitly account for the fact that the population is composed of multiple generations who are at different stages of their life cycle. By modeling the saving, consumption, and labor supply decisions of different generations over time, OLG models can shed light on how tax policies can shift the tax burden between current and future generations. The JCT and the Penn Wharton Budget Model both use OLG models in their analyses.

The Great Debate: Static vs. Dynamic Scoring

Perhaps the most contentious issue in the world of tax modeling is the debate over "static" versus "dynamic" scoring.

Static Scoring

Conventional, or "static," scoring is the traditional method used to estimate the revenue effects of a tax bill. A static score assumes that a tax change will not have a significant impact on the overall size of the economy. It accounts for some behavioral responses, such as individuals shifting income to take advantage of lower tax rates, but it does not incorporate the macroeconomic feedback effects of a tax change on GDP, investment, and employment.

Dynamic Scoring

Dynamic scoring, on the other hand, attempts to account for these macroeconomic feedback effects. A dynamic score will estimate how a tax change will affect the overall economy and then incorporate the revenue effects of those economic changes into the final score. For example, a dynamic score of a tax cut might predict that the cut will lead to higher GDP growth, which in turn will generate more tax revenue, partially offsetting the initial cost of the tax cut.

The Controversy

The debate over static versus dynamic scoring is intensely political. Proponents of dynamic scoring, often Republicans, argue that it provides a more realistic and complete picture of the economic effects of tax policy. They contend that static scoring ignores the pro-growth effects of tax cuts and therefore overstates their cost.

Opponents of dynamic scoring, often Democrats, argue that it is based on uncertain and often politically motivated assumptions. They worry that dynamic scoring can be used to justify fiscally irresponsible tax cuts by making them appear less costly than they actually are.

In recent years, the House of Representatives has adopted rules requiring the JCT to provide a dynamic score for major tax legislation. However, the debate over the appropriate use and interpretation of dynamic scoring continues to be a major fault line in tax policy debates.

Case Studies: Economic Models in Action

To truly understand the interplay of legislative process and economic modeling, it's helpful to examine some real-world examples.

The Tax Cuts and Jobs Act of 2017 (TCJA)

The TCJA, the most significant tax reform in a generation, provides a vivid case study of how economic models are used—and debated—in the legislative process. The law, passed via reconciliation with only Republican votes, made sweeping changes to the tax code, including a dramatic reduction in the corporate tax rate, a new deduction for pass-through businesses, and a host of changes to the individual income tax.

The economic analyses of the TCJA from the JCT, CBO, and various think tanks were central to the debate over the bill.

The Joint Committee on Taxation (JCT): The JCT's dynamic analysis of the TCJA projected that the law would increase GDP by an average of 0.7% over the 2018-2027 period and that the macroeconomic effects would generate an additional $385 billion in revenue, offsetting about 26% of the bill's static cost.
The Congressional Budget Office (CBO): The CBO's analysis, conducted after the law was passed, was less optimistic. While acknowledging a short-term boost to the economy, the CBO projected that the long-term effects would be more modest due to the impact of the law's large increase in the national debt. In a later analysis, the CBO found that extending the individual tax cuts in the TCJA would actually shrink the economy in the long run due to the negative effects of higher deficits.
The Tax Foundation: Using its TAG model, the Tax Foundation was one of the most bullish analysts of the TCJA, projecting that the law would increase long-run GDP by 3.5%, boost wages by 2.7%, and create nearly 900,000 new jobs.
The Tax Policy Center (TPC): The TPC's analysis focused heavily on the distributional effects of the TCJA, finding that the law would disproportionately benefit high-income households. Their macroeconomic analysis projected a more modest short-term boost to GDP, with little to no effect in the long run.

These divergent analyses highlight the inherent uncertainty in economic modeling and how different assumptions can lead to vastly different conclusions. The dueling forecasts were used by both supporters and opponents of the TCJA to make their case to the public.

The Expanded Child Tax Credit

The debate over the expansion of the Child Tax Credit (CTC) provides another compelling example of the role of economic models in policy debates. The American Rescue Plan, enacted in 2021, temporarily expanded the CTC, making it fully refundable and increasing its value. This led to a significant reduction in child poverty.

The debate over making the expanded CTC permanent has been heavily influenced by economic modeling, particularly around the issue of its potential impact on labor supply.

The Joint Committee on Taxation (JCT): The JCT's analysis of a permanent CTC expansion found that it would have a negative impact on GDP, primarily due to a reduction in labor supply. The JCT projected that the increased income from the credit would lead some parents to work less.
The Center on Budget and Policy Priorities (CBPP): In contrast, the CBPP has argued that the work disincentives of an expanded CTC are overstated and that the long-term benefits to children, in terms of improved health and educational outcomes, would far outweigh any modest reduction in parental employment.
Other analyses: A number of academic studies have also weighed in on the issue, with some finding evidence of a small negative effect on labor supply and others finding no significant effect.

This case study demonstrates how economic models are used to analyze not just the broad economic effects of a policy, but also its more nuanced impacts on individual behavior.

A Historical Perspective: The Evolution of Tax Modeling

The use of sophisticated economic models in tax policy is a relatively recent phenomenon. The JCT began developing its macroeconomic analysis capabilities in the mid-1990s, and the requirement for dynamic scoring is a product of the 21st century.

However, the idea of using economic analysis to inform tax policy has a longer history. The Tax Reform Act of 1986, a landmark piece of legislation that dramatically lowered tax rates and broadened the tax base, was the subject of intense economic analysis. The debate over the 1986 act helped to lay the groundwork for the more sophisticated modeling that is used today.

Over time, the models themselves have evolved, becoming more complex and incorporating more detailed data and more sophisticated assumptions. The JCT, for example, has continually updated its models to better reflect the realities of the modern economy.

The Limits of the Crystal Ball: Criticisms and a Call for Humility

For all their sophistication, economic models are not crystal balls. They are based on a set of assumptions about how the economy works and how people will behave, and those assumptions are inherently uncertain. Critics of economic modeling point to a number of limitations:

Uncertainty: The economy is an incredibly complex system, and it is impossible to predict with certainty how it will respond to a change in tax policy. The wide range of estimates for the effects of the TCJA is a clear illustration of this uncertainty.
Political Bias: While the official scorekeepers at the JCT and CBO strive for objectivity, the think tanks that produce their own analyses often have a clear ideological orientation. This can influence the assumptions they use in their models and the conclusions they reach. Even academic economists are not immune to political bias.
Garbage In, Garbage Out: The results of an economic model are only as good as the data and assumptions that are fed into it. If the assumptions are flawed, the results will be as well.

It is crucial for policymakers and the public to approach the results of economic models with a healthy dose of skepticism. These models are valuable tools for informing the policy debate, but they should not be treated as infallible predictors of the future.

Conclusion: A More Informed citizenry in the tax debate

The journey of a federal tax bill is a complex and often contentious process, a marathon of legislative hurdles and political negotiations. At the heart of this process lies a fascinating and often-overlooked world of economic modeling, a world where complex algorithms and competing assumptions shape the very fabric of our tax code.

Understanding this process—the legislative steps, the key players, and the analytical tools they use—is essential for any citizen who wants to engage in the great debates over tax policy. By pulling back the curtain on this intricate world, we can become more informed and more effective participants in the ongoing conversation about how we, as a nation, should raise the revenue that funds our government and shapes our economy. The next time you see a headline about a new tax proposal, you will have a better understanding of the long and winding road it must travel, and the unseen architects who are shaping its design.