NCPA - National Center for Policy Analysis

A First Crack at Dynamic Scoring

April 7, 2003

The best way of measuring supply-side effects on the Bush tax plan may be with commercial econometric models, says Bruce Bartlett. Corporations use them to calculate the impact on sales of changes in economic growth, interest rates and other economic variables. These models are based on past economic data and assume that people will behave in the future as they have in the past to changes in economic conditions.

The Congressional Budget Office (CBO) used two commercial models to look at the Bush plan.

  • The best known of them, the Global Insight model (formerly the DRI-WEFA model) showed continuing positive growth effects from the tax cut.
  • The model estimated that a larger economy recoups about 30 percent of the static revenue loss.

One problem with the CBO analysis is that it looked at all provisions of the President's budget, including higher spending and those tax cuts that clearly will have no growth effect. According to Bartlett:

  • The higher spending retards growth, while the non-supply-side tax cuts inflate the revenue loss without producing any economic growth.
  • If the analysis were limited only to the supply-side features of the tax plan, all of the models would show strong growth effects.

In the future, Bartlett said he hopes the CBO will do more to break out specific provisions of tax and spending proposals and look at them individually. This will show that some tax cuts significantly raise growth, while others have no impact whatsoever. Hopefully, this will encourage Congress to enact more of the former and less of the latter. In any case, the CBO is to be commended for taking the first baby step toward dynamic revenue estimating.

Source: Bruce Bartlett, "A First Crack at Dynamic Scoring," April 7, 2000, National Center for Policy Analysis.

 

Browse more articles on Tax and Spending Issues