New Rules Introduce Dynamic Scoring to Tax Law
March 26, 2015
The appointment of Keith Hall as director of the Congressional Budget Office (CBO) coincides with the adoption by Congress of a rule change that requires "dynamic scoring" of proposed tax law changes.
The appointment of Hall appears to signify an intention, going forward, for the CBO to adhere to the spirit, as well as the letter, of the new congressional mandate, writes David Tuerck, senior fellow with the National Center for Policy Analysis.
What is dynamic scoring? It is a method of measuring the impact on tax revenues of a change in tax law by taking into account how that change will affect the base on which the tax is imposed. Because changing a tax law will always change the economic activity on which the tax is imposed, it would be nonsensical to assume the tax base will remain fixed under a new law. Yet that is exactly what the proponents of "static scoring" want to assume. And it is static scoring that dynamic scoring is intended to replace.
- If the government increases the tax rate 10 percent, revenues will rise less than 10 percent because the base will shrink in response to the higher rate.
- Similarly, if the government cuts the tax rate 10 percent, revenues will fall less than 10 percent since the base will expand.
The best way to model the effects of changes in tax law or environmental rules is to construct a simulation model that takes as a given what the evidence has to say about how economic agents (buyers and sellers) respond to the incentives and disincentives created by those changes, notes Tuerck. Hall needs to keep firmly in mind the principle that any model worth considering recognizes tax increases exert negative effects, and tax decreases exert positive effects, on economic activity.
Source: David G. Tuerck, "New Congressional Budget Office Director Keith Hall and Dynamic Scoring," National Center for Policy Analysis, March 25, 2015.
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