BEYOND THE NUMBERS
The Senate narrowly adopted an amendment to its recent budget resolution that would require the Congressional Budget Office and Joint Committee on Taxation to prepare “dynamic” estimates of the budgetary impact of tax legislation. But, policymakers should reject the temptation to use “dynamic scoring” to estimate how tax reform proposals would affect the budget, as we have explained.
Contrary to widespread misunderstanding, the standard estimates of tax and spending proposals from CBO and other federal agencies aren’t “static.” They incorporate many changes in individual and business behavior that occur in response to changes in tax rates and other policies. They don’t, however, include estimates of 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 several very good reasons why federal agencies don’t use dynamic scoring.
- Estimates of the macroeconomic effects of tax changes are highly uncertain. Economists don’t agree on the size of macroeconomic feedbacks from reducing marginal income tax rates or other tax changes. They would likely be small, however, according to most studies. That is, they would not have large enough effects on revenue estimates to justify the problems that dynamic scoring would create.
- Dynamic scoring would impair the credibility of the budget process. Because the estimates of macroeconomic feedbacks are so uncertain, observers would almost surely view the revenue estimates on which they are based as biased and politically motivated. And, to use dynamic scoring for the first time in estimating a tax reform proposal would appear arbitrary and seem like a budgetary gimmick.
- To assure fairness and consistency in the budget process, federal agencies would have to use dynamic scoring for spending bills as well as tax bills. Government investments in infrastructure, education, and basic research can boost long-term economic growth, just like private investment.
- Dynamic scoring would make deficit reduction harder to achieve. Given our nation’s projected long-term budget deficits, the single most important goal of tax reform should be to raise substantial revenue, in a progressive manner, as part of a balanced deficit-reduction plan that also includes reductions in projected spending. With dynamic scoring, however, policymakers could replace real changes in tax policies with speculative revenue gains based on the assumed macroeconomic benefits of tax reform, in which case deficit reduction would lose out.