Opinion Editorial | |
| Monday, March 15, 1999 | |
Dynamic Scoring of Tax Cuts |
A few weeks ago, Republicans were confident that they could quickly recoup their political losses from the impeachment debacle by pressing forward with a big tax cut. Since then, bickering among Republicans over the type of tax cut to pursue -- an across-the-board tax rate reduction or targeted tax cuts -- has slowed their progress. But a much more serious impediment to tax cuts is the straight-jacket Republicans have gotten into by, in effect, endorsing Bill Clinton's plan to reserve almost all of the budget surplus to "save" Social Security.
The key problem is that Republicans are afraid of being attacked by Democrats for using any of the Social Security surplus to pay for tax cuts. Unfortunately, the Social Security surplus accounts for all of the surplus until 2001, and then the non-Social Security surplus is just $7 billion, according to the Congressional Budget Office (CBO). So as long as Republicans stick to their position on reserving the Social Security surplus, there is no surplus and therefore no money to pay for a tax cut.
One way out of this box would be for Republicans to use dynamic scoring to estimate the budgetary effects of a tax cut. Under current static methods, neither the Joint Committee on Taxation (JCT) nor the CBO incorporate the macroeconomic effects of tax cuts on revenues. Thus if a tax cut were to stimulate faster economic growth, thereby enlarging the tax base, any additional revenues generated by this effect would not be included in the revenue estimate. This has the effect of making tax cuts appear to lose more revenue than they actually do.
A recent analysis of the proposed 10 percent reduction in tax rates being promoted by some Republicans illustrates how dynamic scoring works. According to the Heritage Foundation, the static revenue loss from such a tax cut is $802 billion over 10 years, but the dynamic revenue loss is just $637 billion, or 20 percent less. (see figure) This results from a larger gross domestic product and higher employment due to the tax cut. And remember that in a $9 trillion economy, with the federal government taking more than 20 percent, the increase in growth need not be large to generate substantial additional revenues.
Although dynamic scoring is no panacea for the Republicans' budgetary problems, it would make it easier to both cut taxes and still maintain a large surplus. House rules already allow Majority Leader Dick Armey (R-Texas) to request a dynamic score from the JCT, but the authority has never been used. Now would be a good time for him to ask for one.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, March 15, 1999.
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