NCPA - National Center for Policy Analysis

Scoring Growth From Tax Changes

January 23, 1997

Congress' Joint Committee on Taxation (JCT) asked many of the nation's best economic modelers to estimate the economic effects of two alternative tax reforms. Their reports at a recent conference indicate that some tax reforms can spur economic growth, and that the effects of tax cuts or increases should be taken into account in the federal budget process.

Currently when Congress or the Treasury Department estimates the impact of proposed tax cuts on federal revenue, they ignore the effect these can have on economic growth.

Small tax changes have little effect on output, unemployment or inflation. But large cuts or increases in taxes do have economic effects; if these aren't taken into account, projections overstate the amount of revenue tax increases will raise and the loss of revenue produced by tax cuts. This creates a bias in favor of higher taxes. In fact, under current budget rules tax cuts have to be matched by spending cuts so that the budget deficit isn't increased.

Dynamic scoring is a way to account for the economic effects of tax changes -- which in some cases can be quite large. For instance, the JCT's economic modelers compared a comprehensive income tax that would broaden the base of taxable income and lower rates to a flat-rate consumption tax, which could be a national sales tax, a value-added tax or a tax on income less savings.

  • One model found that a comprehensive income tax rate of 25 percent would be required to collect the same revenue as a 22.4 percent consumption tax rate.
  • Another model showed that a flat-rate consumption tax of 18 percent to 19 percent would yield the same amount as currently collected.

The consensus of the economists was that dynamic scoring should be included in the budget process. This would make it easier for Congress and the Clinton administration to agree on tax cuts and tax reform. For instance, pro-growth tax cuts such as reducing the tax on capital gains might recoup 25 percent of the revenue loss, meaning spending would have to be cut less.

Source: Bruce R. Bartlett (Senior Fellow, National Center for Policy Analysis), "A Victory for Supply Siders," Wall Street Journal, January 23, 1997.

 

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