General Rule: Tax Estimates

In order to further one’s understanding of any issue involving tax rates and revenues, assume this statement is true:

Estimated tax revenues are always wrong.

Imagine that making revenue forecasts is like making weather forecasts for a specific Tuesday three months from now, with all the highly detailed computer models and as many variables as you like – you can even posit a trillion more weather data collecting stations than we actually have.

Now imagine that the weather finds out what the forecast is for that specific Tuesday three months from now as soon as the weatherman announces it, same as you. And the weather doesn’t like the weatherman.

You think that forecast is going to be accurate when the Tuesday in question rolls around?

So whenever people start talking about how some fiddling or other with anything that’s going to generate or cost revenue, ask yourself this: did they take into account what people are likely to do in response to that fiddling? And do their assumptions about people’s reactions actually make sense?

Throw in random stuff happening all over the world – major earthquakes, etc. – and it becomes very, very obvious that financial estimates are little better than slightly-educated guesses. Doesn’t mean they aren’t worthwhile; does mean that the models need to be examined pretty closely, in case somebody’s making unwarranted assumptions.

 

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About pancakeloach

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