The Benefits of Dynamic Scoring
May 6, 2002
Tomorrow (May 7), the House Ways and Means Committee will discuss the weaknesses in current revenue forecasting methods, says Bruce Bartlett. It should press for the use of dynamic scoring -- taking into account the economic effects of tax changes and their impact on revenues -- wherever possible.
The Treasury Department and Joint Committee on Taxation calculate the revenue effects of tax changes on a static basis; that is, without fully accounting for their impact on key economic variables.
Somewhere between a zero percent tax rate and a 100 percent tax rate there is one that maximizes revenue. Above this point, tax rate reductions will increase revenue; below, they will lose it.
Particular tax rates can be cut at no revenue cost on economically sensitive forms of income, such as capital gains, and on people whose attachment to the labor force is weak, such as spouses whose mates earn more than they do.
Tax cuts that will reduce revenue as much as static estimates indicate are principally those that do not affect incentives; i.e., that do not change relative prices, such as the tradeoff between work and leisure or saving and consumption. Unfortunately, this includes most tax cuts of recent years, such as the child credit and last year's tax rebate.
- Static scoring creates a bias in favor of tax increases and against tax cuts.
- It also biases the political system against tax cuts that would positively affect growth, and thereby increase tax revenues, in favor of those that have virtually no effect (see figure).
- And it encourages tax increases that are more harmful to growth than necessary to obtain a given amount of revenue.
In particular, static scoring encourages increases in marginal tax rates and discourages marginal rate cuts.
The solution is to incorporate all economic effects of tax changes in revenue forecasts.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, May 6, 2002.
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