Welcome to the Fiscal Analysis Center.
Convention fiscal 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 career is being compared with someone who is 25 and just starting to work and pay taxes. The Fiscal Analysis Center's research considers fiscal impacts on a lifetime basis and examines different age cohorts separately. This cohort-specific, remaining lifetime analysis is prescribed by economic theory. So too is examining the dynamic feedback effects of fiscal policy on the economy's growth.
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.
The Fiscal 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 17 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 2014, for example, the fiscal gap stood at $210 trillion, whereas official debt in the hands of the public was only $13 trillion. The Fiscal 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 Fiscal Analysis
A key focus of the Fiscal Analysis Center will be the macroeconomic impact through time of fiscal reforms. Academic economists have spent decades developing highly detailed, reliable and empirically plausible dynamic simulation models that are capable of showing us how the economy would likely respond in the short-, medium-, and long-terms to fiscal changes be they increases in tax rates, changes in the tax structure, increases in government consumption, changes in Social Security and other transfer programs, reform of the corporate income tax, etc.