1 The Open Source Policy Center:our modeling approach Kevin A. Hassett “Collaborating on facts so we can compete on ideas.” AMERICAN ENTERPRISE INSTITUTE September 2016
2 What is OSPC? The Open Source Policy Center is an initiative directed by Matt Jensen within the American Enterprise Institute (AEI), a think tank in Washington, D.C. Founded to fill Washington’s need for a policy-focused institution dedicated to transparency, accuracy, and competition in the modeling of fiscal policy proposals. While the modeling legwork necessary for a project of its scale has been underway for some time, the OSPC launched publicly this past March. Our intent from the beginning is to build a flexible microsimulation model that can be bridged to state of the art macro models for dynamic scoring. Rick Evans of the BFI Fiscal Studies Initiative and his team have accomplished extraordinary things, both linking their own model, but blazing a path for others to as well. Rick is also heading up a new effort to expand training and education in open source methods and dynamic tax modeling.
3 AEI’s Open Source Policy Center is transforming the way economic policy analysis is conducted in America by unleashing the crowd OSPC is achieving this by… Building the first-ever open source scoring models for U.S. tax policy analysis; Collaborating with researchers and economists around the country to build the most innovative, accurate, and reliable models and foster active discussion on modeling and economics; Giving access to policymakers, economists, journalists, students, and engaged citizens through a web application and other tools designed specifically for non-programmers to use and understand. While bridging between a microsimulation based on actual U.S. population parameters and a general equilibrium macroeconomic model. OSPC facilitates a competition of ideas by making the U.S. fiscal policy debate more transparent, fact-driven, and more accessible.
4 Policymakers and the public rely on models (whether they realize it or not) to understand the trade-offs between policies. Models provide answers to key questions raised by new policy proposals: Who will benefit and who will be hurt? How will individuals change their behavior? How much money does the government stand to gain or lose? What will happen to growth and the overall size of the economy? By answering these and other questions, tax models influence which policy ideas become law and shape public opinion on fiscal policy.
5 Until now, the models that were the workhorses in U. SUntil now, the models that were the workhorses in U.S. fiscal policy debates were closed. And none bridged between microsimulation and macroeconomic general equilibrium models. Joint Committee on Taxation (JCT) Tax Policy Center (TPC) Closed model: Access primarily limited to congressional party leadership. Closed model: Access limited to TPC. Office of Tax Analysis (OTA) National Bureau of Economic Research (NBER) Closed model: Access limited to executive branch. Limited use: Primarily for historical research. These models have significant limitations: Slow to adopt economic advances Limited accessibility and lack of transparency Limited scope for peer review Dynamic effects? Where is the micro-macro link? Closed models limit competition between different approaches to modeling fiscal policy, a detriment to the community regardless of your own favored approach.
6 The Open Source Policy Center is making policy analysis more transparent, trustworthy, collaborative, and open. We have built… Tax models everyone can use freely and see inside An easy to use interface for policymakers, economists, journalists, students, and engaged citizens We are collaborating with researchers… To find errors To improve and expand the models We are encouraging users… To test tax policy ideas—theirs and others’ To test different economic assumptions To build online widgets powered by our models
7 Some highlights of our U.S. media output…An endorsement from the Wall Street Journal editorial board (April 2016)... A widget embedded in the WSJ’s “Why it’s so hard to close tax loopholes”… The subject of articles by the Washington Post’s Wonk blog... “The search for the best middle-class tax cut”
8 Some highlights of our U.S. policy output…Practically real-time assessments of candidate tax policy proposals, capable of changing as candidate positions change… “How many households will Trump take off the income tax rolls?” – OSPC Managing Director Matt Jensen, Sept. 15, 2016 “Digging deeper into the Trump tax plan's revenue hole” – OSPC Managing Director Matt Jensen, Aug. 12, 2016 “Trump's new tax brackets aren't a magic bullet for cost savings” – OSPC Managing Director Matt Jensen, Aug. 10, 2016 As well as policy analyses of enduring relevance…. “Leaving childless taxpayers behind in the tax code”, Tax Notes, Aparna Mathur (AEI) and Adele Hunter (AEI), July 2016 “Understanding middle-class tax cuts”, AEI Economic Perspectives, Alex Brill (AEI), April 2016
9 How can you use OSPC’s resource to model fiscal policy?While the OSPC has many projects that it hopes to unveil in the future, at this moment, TaxBrain is OSPC’s primary interface with the economics and policy communities.
10 What data does TaxBrain use and where does it come from?TaxBrain relies on TaxData. TaxData is based on data from the Statistics of Income division of the IRS. In accordance with Congressional Budget Office forecasts, the IRS data on the distribution of income and tax liability is extrapolated into the future. This process is intended to match a confidential process performed at the Congressional Joint Committee on Taxation. Additional information on non-filers is taken from the U.S. Census Bureau’s March 2013 Current Population Survey.
11 TaxBrain, OSPC’s workhorse interface for fiscal modeling, offers sophisticated economic tools through a simple user interface. With TaxBrain… You control an iterative policy modeling process: enter policy inputs and receive economic outputs within minutes. But if you would like to examine the underlying economic modeling assumptions, consult the OSPC’s extensive documentation. If you would like, contribute your own ideas, since OSPC is open-source.
12 You Can also Connect Your Own Model!Integrating Microsimulation Tax Functions into a DGE Macroeconomic Model: A Canonical Example ∗ Jason DeBacker† Richard W. Evans‡ Kerk L. Phillips§ September 2016 (version a) Abstract This paper integrates individual effective tax rates and marginal tax rates from a microsimulation (partial equilibrium) model of tax policy with a dynamic general equilibrium (DGE) model of tax policy that can provide macroeconomic analysis or dynamic scores of tax proposals. Our approach utilizes the rich heterogeneity, realistic demographics, and tax-code detail of the microsimulation model and allows this detail to inform a general equilibrium model with a relatively high degree of detail. We apply this approach to a canonical example of tax policy change—a 10-percent cut in statutory marginal income tax rates with a doubling of the standard deduction. We find that such a tax cut increases GDP by about 1.4 percent in the long run. Accounting for these macroeconomic effects of the tax change results in the an offset of about 53 percent of the static cost of the tax cuts.
13 Wrapping up We are shaping fiscal policy debates in the United States and around the world through our introduction of a transparent, open-source model for scoring tax proposals. Our modeling approach generates new estimates as fast as fiscal politics change. We offer an interface that, while simple, harnesses the power of sophisticated of economic analysis through TaxBrain. If you would like to collaborate, please get in touch: we are dedicated to helping open-source modeling flourish within the economics and policy communities. We have plans in the future to expand the reach of our model beyond taxation and into other policy areas, like health care and entitlement reform. Now let’s take it out for a spin