Tax Reform’s GIGO Problem

The state has signed a contract with Ernst & Young to analyze New Mexico’s tax code.


With the Land of Enchantment’s economy weak and fiscal health iffy, hundreds of thousands of dollars will be paid to the accounting behemoth to “develop a model that will allow legislators to analyze the effects of changes to the rates or structure of New Mexico’s tax system.”

The problem with tax modelling is the same as with any type of modelling: If the assumptions are wrong, the conclusions will be wrong — often, spectacularly so.

The Congressional Budget Office’s record of blunders is instructive. The CBO has flubbed everything from Obamacare to economic growth, farm subsidies to the national debt. Modelling human behavior is extremely difficult. Misunderstand how people respond to incentives, and your estimations will be all but worthless.

It’s a safe bet that Ernst & Young recognizes the realities of working for a political entity — it knows that New Mexico’s far-left legislature is not interested in sweeping tax reform/relief in a state where the populace is heavily dependent on government employment. Will its model offer an option to dynamically score tax changes, so that their potential stimulative effects will be estimated? Will it factor in deadweight losses? Will it account for the widespread consensus that tax perks for “economic development” are useless? (If not destructive?)

Time will tell, of course, but the Foundation will be watching Ernst & Young, as closely as we can, for signs of bias.

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