"Models" For Dynamic Scoring
January 28, 1997
The House of Representatives has adopted a rule to consider the economic effects of tax law changes when considering tax cuts. It would move from "static" scoring, which ignores the effects of tax law changes on individuals, to "dynamic" scoring, which tries to factor in the anticipated results. Now those who build computer models to predict or estimate the effect of tax cuts are exhibiting their wares on Capitol Hill. Most economists believe that some tax cuts will cause growth that helps offset the loss of revenue by the reduction. The question is, how big the effect will be.
- One issue being studied is the effect of replacing the present tax code with either a consumption tax -- which could be either a national sales tax or a flat tax that exempted savings and investments -- or a flat rate on all income, regardless of source.
- Most economic modelers have found that any of these reforms in the tax code would be better for the economy -- with the consumption tax better than a unified flat tax.
- A model developed by Coopers & Lybrand found that real output in 2006 would be more than 1 percent higher under either tax reform, and faster growth would partially offset revenue losses.
The Coopers & Lybrand model vindicated former GOP presidential candidate Bob Dole's claim that a 15 percent cut in marginal tax rates would be partially "paid for" by extra economic growth.
Source: Perspective, Tax-Cut Dynamics, Investor's Business Daily, January 28, 1997.
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