Two liberals, New York Times columnist Paul Krugman and Slate columnist Jamelle Bouie, launched misguided broadsides against dynamic scoring this week. Dynamic scoring pertains to how the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) score—namely, calculate the budgetary cost of–bills that impact government spending and tax revenues respectively (both Krugman and Bouie wrongly write CBO scores tax bills, when in fact JCT does).
Under its current conventions, in its official score of how tax legislation affects revenue, JCT uses a static analysis. This means it does not take into account how changes in tax policy change the way people, businesses, investors and entrepreneurs change their behavior in response–even though it is widely accepted they do.
For example, a higher tax rate would bring in more revenue, but it would also cause people to work, save and invest less because their incentives for doing those things decreases with higher rates. The reduction in those productive activities would reduce the amount of revenue the tax hike would raise because the economy would produce less income than it would have in the absence of the hike.
But in static scoring, analysts would only look at the increased tax revenue the higher tax rate would bring—and illogically would assume that everyone would work the same amount, thus over-estimating the actual amount of revenue the tax increase would raise.
Dynamic scoring, on the other hand, accounts for those behavioral changes and therefore shows how they affect the economy and tax revenues.
JCT recently submitted a supplemental dynamic estimate in addition to its official score of House Ways and Means Committee Chairman Dave Camp’s, R-Mich., tax reform proposal. This was the first time JCT did such an analysis and it marked a huge step forward for achieving tax reform.
Krugman objects to dynamic scoring because he does not believe reducing tax rates will improve economic growth. He calls the belief that it does voodoo. He writes:
During his failed bid for the 1980 Republican presidential nomination George H. W. Bush famously described Ronald Reagan’s “supply side” doctrine — the claim that cutting taxes on high incomes would lead to spectacular economic growth, so that tax cuts would pay for themselves — as “voodoo economic policy.” Bush was right. Even the rapid recovery from the 1981-82 recession was driven by interest-rate cuts, not tax cuts. Still, for a time the voodoo faithful claimed vindication
Bouie, on the other hand, accepts that people respond to changes in tax policy, but does not like dynamic scoring because he feels it is too hard to accurately measure the changes to the economy that result:
The main problem with dynamic scoring is it’s extremely difficult to do it with real accuracy. To make a fair estimate with dynamic scoring, you have to make big assumptions about a policy and its relationship to the broader economy. And given countless moving parts in a modern economy, it’s hard to do this without adding bias, ideological or otherwise. For the CBO and other mainstream analysts, it’s more reliable to give a static score of the direct effects of a policy and leave it at that.
JCT’s recent dynamic estimate of tax reform shows how off base they are. It proves that changes in tax policy affect behavior and that those changes can be modeled with reasonable confidence of accuracy.
Both Krugman and Bouie argue that Republicans want to use dynamic scoring to help pass tax cuts. However, Republicans in Congress are not talking about cutting taxes. They are talking about reforming the tax code. Those are two distinctly different things.
The purpose of tax reform is to boost the potential of the economy by reducing marginal tax rates on working, saving, investing and taking risk. These activities are the building blocks of economic growth and increasing people’s incentives to engage in them will raise the economy’s growth track going forward.
Tax reform would reduce marginal tax rates while at the same time repairing the tax base. The tax base is what the tax code taxes. A proper tax base is as important as lower rates.
In fact, the current broken tax base is a major reason the system is a substantial drag on the economy. For instance, people now are taxed multiple times when they save and invest, which discourages them from doing so.
Done right, the revenue loss, if any, from tax reform that lowered rates and applied a proper tax base would be minimal–even before taking account of the dynamic growth effects.
Opponents of dynamic score are fond of saying it never gets the right answer. But the purpose of modeling tax reform isn’t to nail exactly what GDP will be 10 years after its implementation. It’s to give Congress a sense of how much stronger the economy will be if it improves the code, apart from other factors that affect the economy.
Dynamic scoring is a better approach than static scoring because it is more accurate in measuring the growth effects of reform. I explained why in more detail in testimony during a recent House Ways and Means Committee hearing on dynamic scoring.
Since the purpose of tax reform is to strengthen economic growth, it is sensible that Congress should have estimates of how well it achieves that core purpose.
During the immigration debate last year, CBO provided a dynamic analysis of the Senate bill so Congress could get a better understanding of how changing our immigration laws would impact the economy. Bouie didn’t object then, nor did Krugman have much to say on the matter. It seems neither has a problem with dynamic scoring if it is in support of a policy they approve. Funny, that.
