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Five things an economist thinks are important in analyzing the domestic production deduction: what accountants and lawyers should know about economists.

Article Excerpt
INTRODUCTION

This paper provides the perspective of an economist to an ongoing dialogue regarding how economists, accountants and attorneys can learn from one another and, thus, improve their analysis of tax policy issues. To narrow and provide specifics for our National Tax Association Spring Symposium audience, the participants in this session focused on the domestic production activities deduction, which was enacted as a part of the American Jobs Creation Act of 2004.

I have elected to further restrict my discussion and provide the perspective of a revenue estimator. This perspective is distinctly different from that of many other economists, particularly most academic economists. By function, the revenue estimator is providing a very narrow analysis of the implication of a policy change--the annual revenue cost of a particular provision over the subsequent decade. Revenue estimation is also distinct in that this analysis typically must be completed in days or hours rather than over weeks or months. Often this analysis is occurring at the same time that the proposal and its legislative language are being finalized. (1) While this is a very narrow form of economic analysis, it is one where lawyers, accountants and economists do collaborate on a repeated basis. Thus I believe that it is a good starting point for a dialogue regarding how to strengthen and broaden communication and collaboration across disciplines in the tax community.

While formally the issue at hand is the production deduction, I view this more as a parable about what economists, accountants and lawyers can learn from one another. The issues highlighted here are broadly applicable to any major tax policy proposal that might need analysis.

A Short History

In the summer of 2001, the World Trade Organization ruled in favor of the European Union (EU) and found the extraterritorial income provisions of the tax code (ETI) to be an illegal subsidy. This ruling was appealed by the U.S. and was upheld in January 2002. These rulings opened the door to over $4 billion dollars of trade sanctions by the EU. In response, the U.S. signaled its intention to repeal the provisions, but indicated that it would take some time and, as a result, the EU postponed the application of the allowable sanctions.

This set the stage for a policy debate that would take almost two years to resolve. The repeal of ETI would raise about $6 billion annually in tax revenue. The issue that Congress was faced with was determining what that revenue would be used for. Given the tax cuts for individuals enacted in 2001, there was pressure from the business community for a business/ corporate tax cut. Through many twists and turns, it became clear...