As policymakers consider various approaches to tax reform, they should reject the temptation to use “dynamic scoring” to estimate how tax reform proposals would affect the budget, our newly updated report explains.
The House passed a bill in February that would require the Congressional Budget Office (CBO) and the Joint Committee on Taxation to prepare “dynamic” estimates of the budgetary impact of major legislation.
Contrary to widespread misunderstanding, the standard estimates of tax and spending proposals that CBO and other federal agencies prepare are not “static.” They incorporate many changes in individual and business behavior that occur in response to changes in tax rates and other policies.
They do not, however, attempt to estimate whether (and by how much) a change in tax or spending policy would affect the overall economy, such as its impact on economic growth — which, in turn, would affect revenues.
There are very good reasons that federal agencies do not use dynamic scoring.
Estimates of the macroeconomic effects of tax changes are highly uncertain. Economists do not agree on the size of macroeconomic feedbacks from reducing marginal income tax rates or other tax changes. According to most studies, however, they would likely be small and not have large enough effects on revenue estimates to justify the problems that dynamic scoring would create.
Dynamic scoring would also impair the credibility of the budget process. Because the estimates of macroeconomic feedbacks are so uncertain, including them in revenue estimates would inevitably be viewed as biased and politically motivated. Including macroeconomic feedbacks for the first and only time to date in estimating a tax reform proposal would appear arbitrary and would seem like a budgetary gimmick.
There’s more. I’ll discuss dynamic scoring’s harmful impact on tax reform in particular in a followup post.