Dynamic Scoring Works Better
August 19, 2002
When calculating the effects of tax changes on federal revenue, the government does not take into account the economic effects of the change. This process, called dynamic scoring, is the proper way to evaluate tax policy, according to Bruce Bartlett.
Currently, there is a systematic bias in the revenue scoring process that encourages tax increases and discourages tax cuts. For example, without dynamic scoring:
- A Congressman will believe that a 10 percent increase in taxes will yield a 10 percent increase in revenues, when in fact revenues will rise perhaps 7 percent.
- Similarly, the same Congressman will believe that a 10 percent tax cut will cost the government 10 percent, when it probably will only lose 7 percent.
Another problem is that revenue changes are calculated against a "baseline" that implicitly assumes everything else will stay the same. This is unrealistic; taxes rise because of inflation and real growth in the economy, which pushes people up into higher tax brackets. The Congressional Budget Office (CBO) finds:
- Had the 2001 tax cut not been enacted, the average marginal tax rate on labor income would have risen automatically from 21.1 percent in 2001 to 22.5 percent in 2011 (see figure).
- Thus, opposing the tax cut was equivalent to voting for a tax increase on workers.
- The "huge" Bush tax cut brought the average marginal tax rate down to 20.5 percent and will lower it to 19.9 percent by 2006.
- However, in 2010, the tax cut is automatically repealed, hiking the rate to 22.5 percent
While dynamic scoring is more difficult and time-consuming, it is ultimately more effective and informative.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, August 19, 2002.
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