Senate Finance Committee Republicans have recommended that the Joint Select Committee on Deficit Reduction use “dynamic scoring” to estimate the budgetary effects of tax proposals. In a paper released today, we explain why that’s a bad idea.
Contrary to widespread misunderstanding among policymakers and others, the standard estimates of tax and spending proposals that the Congressional Budget Office (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, include estimates of “macroeconomic feedbacks.” That is, they do not attempt to estimate whether, and by how much, a change in tax or spending policy would affect the overall economy. They do not, for instance, include estimates of how a proposal would affect GDP growth and, therefore, do not include an estimate of how any change in GDP 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 impair the credibility of the budget process. Because the estimates of macroeconomic feedbacks are so uncertain, including them in revenue estimates would be highly controversial and inevitably viewed as biased and politically motivated. A Joint Committee decision to include macroeconomic feedbacks for the first and only time in its estimate of any bill that it reports would appear arbitrary and would seem like a budgetary gimmick.
Finally, if the Joint Committee can craft a package of tax changes that would expand the income tax base by eliminating various tax preferences, the economy would benefit more from using the additional revenues to reduce budget deficits rather than to cut marginal tax rates. When economic resources are fully employed, deficits reduce saving, investment, and economic growth and, according to most estimates, reducing deficits will have a larger effect in spurring economic growth than using budget savings to cut marginal tax rates.