Revisiting Dynamic Scoring

Oct 10, 2012 | Budget Process| Taxes

The use of dynamic scoring is one of the most contested issues in the budget world. We highlighted the pros and cons of using it and the issues associated with incorporating it into the budget process in a paper earlier this year.

Proponents say that it would help quantify the impact of pro-growth policies, while opponents say that it may deliver false promises of higher growth rates and lead to more debt. But the debate on dynamic scoring is much more than a disagreement on the effect of lower income tax rates. In a Wall Street Journal article today, David Wessel identifies three points that usually get lost in the dynamic scoring debate.

One, this is hard.

Even without incorporating macroeconomic effects, putting a price tag on a sprawling piece of legislation is tough. Gauging the likely long-run impact on the huge U.S. economy is even tougher. It is time-consuming. It is incomplete. It requires lots of judgment calls. It depends on economic models that give different answers. It requires number-crunchers to make assumptions about how farsighted consumers are, how worker and business behavior will change, how the Federal Reserve will react. A single number is misleading; multiple scenarios are confusing.

Two, both JCT and CBO do it already.

Since 2003, the House Ways and Means Committee has required JCT to provide an analysis of all tax bills....

CBO also has done this for alternative ways to reduce the deficit, and for projecting consequences of going over the fiscal cliff—the tax increases and spending cuts set for year-end. It surely would do it for a Romney tax-reform or Obama deficit-reduction proposal.

Because these analyses aren't factored into official price tags, they are largely ignored by Congress and the press. They don't have to be.

Three, economists find growth effects smaller than politicians expect....

Big deficit-reduction bills or comprehensive tax reform might add a few tenths of a percentage point to annual economic growth.

Over a generation, that is hugely important. In added tax revenue over the 10-year period that Congress uses, not so much.

Whether or not dynamic scoring is used, lawmakers should be promoting pro-growth policies, not depending on overly optimistic assumptions of higher growth to bring in more revenue. Fixing our fiscal problem will require hard choices.  While growth will lessen the pain of these decisions, it is not a panacea. For more on dynamic scoring, check out our paper.