Dynamic Scoring Of Tax Cuts
March 15, 1999
The biggest 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.
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).
One way out of this box would be 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. Their estimates do not include additional revenue generated if a tax cut were to stimulate faster economic growth and thus enlarge the tax base. This has the effect of making tax cuts appear to lose more revenue than they actually do.
- According to the Heritage Foundation, the 10 percent reduction in tax rates proposed by some Republicans would cause a static revenue loss of $802 billion over 10 years.
- The dynamic revenue loss is just $637 billion or 20 percent less -- due to a larger gross domestic product and higher employment created by the tax cut.
- This shows 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.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, March 15, 1999.
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