#tomicki

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Haslag: "inconsistencies and some real problems" with Tomicki analyses

HATFIELD: So let's start with what Dr. Haslag appears to write here. He says: Been playing around with some of the numbers. If I understand the math from the fiscal note analysis that Travis provided, there are inconsistencies and some real problems. Do you know what fiscal note analysis Travis provided to Dr. Haslag?

TOMICKI: I don't.

HATFIELD: How many fiscal note analyses are there?

TOMICKI: There should be one for every version.

HATFIELD: Okay.

TOMICKI: So there were nine initially, then there was the recent four.

HATFIELD: All right. And did you prepare all of those?

TOMICKI: Yes.

HATFIELD: And so Dr. Haslag says there are inconsistencies and some real problems. Do you agree with that?

TOMICKI: No, I don't.

HATFIELD: Okay. Then he's got a paragraph -- and feel free to read this. I was going to skip to the end where he says: The upshot is that the bill would have to tax all investment spending to generate revenue that would be neutral in the first year. Do you agree with that statement by Dr. Haslag?

TOMICKI: No, I don't.

HATFIELD: Is it correct that the bill does not or the proposal does not tax all investment spending?

TOMICKI: That is correct.

HATFIELD: All right. Then why do you disagree with Dr. Haslag on that?

TOMICKI: Well, Dr. Haslag is incorrect since he hasn't seen the model behind it and he looks -- he basically equates business-to-business transactions as investment spending, ignoring intermediate transactions. He has those confused here. So that's why. He's talking about apples and oranges. He doesn't consider intermediate transactions at all.

HATFIELD: Is there any other reason that his conclusion there about revenue generation is wrong?

TOMICKI: Revenue generation is wrong because, again, he's still operating in a mindset that business-to-business intermediate transactions are exempt, as they have always been in his models. Because that is kind of an ideal most efficient economist model. So every model Joe Haslag has proposed involves all business-to-business transactions being exempt. I think that's why he's going wrong about this.

HATFIELD: In Version 13, you're saying all business-to-business are not exempt?

TOMICKI: They are all taxed unless specifically exempt.

HATFIELD: Okay. So which ones are taxed?

TOMICKI: In the intermediate transactions, there are intermediate transactions are taxed, that's business-to-business, and there's business investment which is taxed. And I can look for the model and give you the specific line items.

HATFIELD: Yeah. We can do that in a minute. I thought you told me earlier when you did your model and we were talking at a very high level, I understand, that you exempt out the vast majority of intermediate transactions.

TOMICKI: Correct.

HATFIELD: But I guess that means by definition not all?

TOMICKI: Correct. The vast majority, but not all. There's about -- I don't have the specific numbers. Just under 30 billion of transactions that are intermediate between businesses that would be subject to tax. Given that the total is about 200 billion, 29 billion or so taxed, the rest exempt.

HATFIELD: All right. Let me ask you about the next paragraph. He says: Here's the more basic problem. As soon as the tax applies to investment spending, you lose some of the growth benefits. And I didn't understand that. What is your understanding of what growth benefits mean?

TOMICKI: So the reason Joe Haslag is a proponent of replacing the income tax with a sales tax is because he believes that doing that would increase the rate of growth in the Missouri economy. His arguments are based on something called the AK or solo growth model which implies that the growth of capital in an economy is one of the drivers of economic growth. And thus by taxing business income or personal income, you're reducing the rate of growth in capital. So here when we're taxing some investment, that's what he's expressing concern about. I don't think it's relevant because the model does not assume any increase rate of growth and is still slightly revenue positive.

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Team Rex relies on Rainy Day fund "to smooth out revenue changes" in Everything Tax fiscal impact estimate. See Page 52 of Auditor Tom Schweich's fiscal note background document at http://auditor.mo.gov/Notes/11-64.pdf

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Lucas Tomicki: "We may have a slower year, then we have a faster year or slightly different. There's a business cycle of both. I'm simply forecasting at the long growing rate. I'm acknowledging there's going to be variation. The Rainy Day Fund or other budget sort of stabilization mechanisms allows the state to shift revenue from one period to another to smooth those variations."

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I think he would particularly be embarrassed.

Pelopidas employee Lucas Tomicki on alleged inaccuracies in Everything Tax analyses by Show-Me Institute Chief Economist Joseph Haslag

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Pelopidas Hack Criticizes MU Prof, Show-Me Institute's "Chief Economist"

HATFIELD: Okay. We were talking about this e-mail concerning Dr. Haslag which is Exhibit 5. Dr. Haslag concludes in the next to last paragraph under the ballot initiative considered, the tax base will be more volatile than under the current policy. And I noticed later in the e-mail, I think you disagreed with that conclusion, correct?

TOMICKI: Correct.

HATFIELD: And you said his math is incorrect?

TOMICKI: It is.

HATFIELD: And can you explain to me in layman's terms how so?

TOMICKI: Certainly. Well, the way he calculates volatility, he takes a weighted average of the two tax components. Here he takes 75 percent of the volatility of 1.25 and then he takes a quarter of 8 percent and arrives at a 4.9 percent volatility. I compare this in my e-mail to Travis as looking at a portfolio of tax sources. You have different sources of tax that generates some sort of income, just as if you had a portfolio of stocks. The formula for calculating the variance or for the standard deviation of a portfolio of assets is not the way Joe Haslag calculates it. It's simply arithmetically incorrect. It's basic Finance 101. And I detailed the exact numbers of how this happens here.

HATFIELD: So your calculation there is known in the science world as beta; is that right?

TOMICKI: No, I don't believe.

HATFIELD: What is beta?

TOMICKI: Beta is a variable that comes out of regression analysis comparing rates of return on assets, generally stocks or mutual funds, to some sort of market index, generally the S&P 500. Beta will tell you – and betas, by the way, are not always statistically significant. That's one thing that people don't mention. Betas tend to tell you how volatile the stock is with respect to a specific market index.

HATFIELD: Okay. Do you have an understanding of where Dr. Formula -- Dr. Haslag came up with his formula?

TOMICKI: No, I have no idea.

HATFIELD: It doesn't look familiar to you at all?

TOMICKI: No. It looks like something that I would do on the back of a paper. It seems the first one thinks of -- one would think of. But it's not correct. We know from portfolio theory that's the formula for a portfolio variance.

HATFIELD: All right. So you refer to Dr. Haslag's calculation as a particularly embarrassing mistake?

TOMICKI: I think that's -- I think if it was presented to his fellow members on the board, I think he would particularly be embarrassed.

HATFIELD: And why is that?

TOMICKI: Because it's such a basic fundamental mistake. It's just basic and fundamental. It's taught to students in Finance 101 how to calculate the variance of a portfolio and he doesn't do that correctly. He forgets to square the terms and he arrives at just a very weird number.

HATFIELD: Okay. Have you had other experiences with Dr. Haslag where he has done incorrect calculations?

TOMICKI: Yes, I have.

HATFIELD: What were those?

TOMICKI: The first Show-Me study which I discussed at the beginning which talked about what the tax rate on sales would have to be to replace all income taxes in Missouri. Again, it assumed all personal consumption would be taxed. That's -- that was presented in a paper that was taken seriously and those numbers were used in a bill, a piece of legislation that was proposed in the Missouri House. And yet his analysis didn't exclude things that are non-taxable and things that the government of Missouri shouldn't tax or can't tax pursuant to the constitution or federal tax like Medicaid which is not taxable or food stamps. So he wrote a paper that was taken seriously and used as a basis for legislation that had fundamental flaws that believed that the government could collect tax on individuals living in their own houses. That's their own consumption and other such things. So he's been wrong on many occasions.

HATFIELD: That paper you're referring to about the legislation, I believe was co-authored by somebody named Grant Casteel; is that right?

TOMICKI: I don't know and I don't believe so. This particular paper was a Joe Haslag only paper.

HATFIELD: Do you know Grant Casteel?

TOMICKI: No, I don't.

HATFIELD: Do you believe Dr. Haslag is qualified to give opinions on fiscal impact of proposed measures?

TOMICKI: Well, I don't think he's ever prepared a fiscal impact of a measure.

HATFIELD: Okay.

TOMICKI: I think he is qualified in a sense that he is mathematically able to compile such data. But he has never done it. And every occasion which he's written a paper, he's always referred to theoretical models or economic constructs, which ultimately are not representative of Missouri economy or ballot issues from Let Voters Decide.

HATFIELD: So you're saying you have to have a specific proposal in front of you?

TOMICKI: You have to -- he can talk very well and very knowledgeably about economic models of growth and why growth would occur or why not, what the inputs to those models are. But as far as I'm aware, he's never worked on a paper that looked at an actual economy. All the economies are theoretical models that he's worked on.

HATFIELD: Okay. And so I asked you if he was qualified, and you started with he's never prepared a fiscal impact on a proposal; is that right?

TOMICKI: I've never seen one that he's prepared that --the one study that I referred to at first was not credible because it confirmed -- conferred a rate that was simply impossible in reality.

HATFIELD: And I kind of take it from your answer, that you think it's -- when I asked the question is he qualified to give an opinion, it's relevant to your answer whether he had ever prepared a fiscal impact before; is that right?

TOMICKI: I think the fact that he only has worked on theoretical models makes him qualified to testify on impacts of theoretical models. The reason I've been asked to prepare the fiscal model and the fiscal impact note was because I've been working on this for a certain period of time and only looking at the actual kind of realities of the State of Missouri. So I think Joe, if he spent several months studying this and reviewing it, would certainly be qualified to testify to real world sort of realities.

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Pelopidas Hack: Rainy Day Fund Required to Make Everything Tax Revenue Neutral

CHUCK HATFIELD: So on Page 52, the submission continues. I'm reading kind of the last sentence: However, given the state's ability expressly stated in the constitution to smooth out revenue changes over time using the state's Rainy Day Fund. I didn't understand that. What's the Rainy Day Fund have to do with your analysis?

LUCAS TOMICKI: So this explains why I use averages for the ten years in forecasting forward, even though I know that the next ten years or the next X years, next two or three years, will not be an exact linear approximation of the average of the last ten years. We may have a slower year, then we have a faster year or slightly different. There's a business cycle of both. I'm simply forecasting at the long growing rate. I'm acknowledging there's going to be variation. The Rainy Day Fund or other budget sort of stabilization mechanisms allows the state to shift revenue from one period to another to smooth those variations.

HATFIELD: So is it correct to say then that in order to use the ten-year variation, it's important that you have those budget smoothing tools. Ten-year I said variation. To use the ten-year average, it's important that you have the budget stabilization smoothing tools?

TOMICKI: It's important to be able to not have to exactly spend what you take in every year, so have a stabilization tool, yes. And the state does have that ability either through the Rainy Day Fund or simply the ability to borrow in the bond market at AAA rate.

HATFIELD: And are you assuming the state would access the Rainy Day Fund?

TOMICKI: I'm assuming they have the ability to smooth revenues over time. And I assume that based on my understanding there is a Rainy Day Fund, the fact they can borrow in bond markets given their favorable credit rating, and the fact they have done so in the past. For example, in the last two years while revenues decline, the state didn't cut spending as quickly as revenue declined. They did use various mechanisms to smooth spending declines.

HATFIELD: What steps does the state have to take to access the Rainy Day Fund?

TOMICKI: I don't know.

HATFIELD: How many times has that happened in the past ten years?

TOMICKI: I don't know.

HATFIELD: You mentioned bond borrowing. Do you believe the state has the authority to issue bonds for general revenue purposes?

TOMICKI: I don't know.