Don’t cut sales tax based on flawed economic model
The good folks at the CFAP have been heavily
promoting some of the results of this model, that predict that Rhode Island
will enjoy a tremendous economic boom if only we would eliminate our sales tax.
As
I detailed in that article, the RI STAMP model is flawed not only by a host of
questionable assumptions, but also the laughable attempt to obscure those
assumptions under an absurdly over-complicated presentation of the relevant
equations. Really, there is no reason to do what they do except as a conceptual
bulwark against reporters who are easily cowed by that sort of thing.
Now
comes the Institute for Taxation and Economic Policy (ITEP) to say the same
thing as me. In an epic takedown (summary here, report here), they cite STAMP’s many assumptions that either
cannot be justified by the research literature or are completely contradicted
by that literature or by experience.
“… mask the fact that some tax plans they believe would be economically beneficial are guaranteed to shrink the economy in the short-term.”
ITEP
concludes that from this alone,
“STAMP analyses are of no use in informing the debate over what will be necessary to balance the state’s budget in the wake of a major tax change.”
There
is plenty more, such as STAMP’s implicit assumption of full employment (!) and
the assumption that households spend money in more or less similar ways to
governments. (How many police officers did you employ last year?)
I
am gratified by the validation of my review of this model, but really, the
damning evidence is right in BHI’s own footnotes. That’s where, just to pick
one example, the STAMP designers tell us they assume that all rich people — you
know, the ones who have expensive houses and extensive business and social ties
to their community — are more likely to move to another state for financial
reasons than poor people, who frequently own nothing and have no such ties.
Of
course that’s not how it reads. The actual text talks about elasticities and
the sensitivity of participation rates, but that’s what it means, once you wade
through the verbiage.
In
an email responding to the ITEP analysis, Justin Katz, of the CFAP, said they
think the appropriate response is to average their results with model results
they like less.
“…[T]he Center has long maintained that it is an opportunity for policymakers that they have such divergent models. As we recommended in our recent brief, the General Assembly should take advantage of the two projections as a high-end and a low-end and implement the elimination or reduction of the sales tax with plans to adjust down or up as the monthly results become apparent.”
This,
of course, is not the way it’s done. When the clown honks his little horn and
says the sky at noon is inky black, the proper response is laughter, not to
average his views with yours.
There
are two ways people analyze mathematical models. One way involves detailed
examination of the assumptions used to generate it. The STAMP model fails this
test in spectacular fashion, according to me, and now according to ITEP. The
other way is to validate the model against past events.
That is, a model good
at predicting the future should be good at predicting things that have already
happened. If a model can predict 2014 results from 2013 data then it makes
sense to use it to predict what will happen in 2015.
We
have cut taxes several times in the past 20 years. There were the Almond income
tax cuts of 1997-2002, the capital gains cuts passed in 2001, the flat tax
passed in 2006, and several smaller cuts.
When the CFAP can show us that their
STAMP model would have accurately predicted what actually did happen — and that
the same model predicts what they say about future tax changes — only then will
it be useful to listen to their results. Until then, nothing but laughter from
me, and hopefully everyone else they honk their little horn at.
