Dynamic Scoring: Another Tax Reform Pitfall
Posted by: Paul N. Van de Water
Posted in: 2001/2003 Tax Cuts, Alternative Minimum Tax, Businesses, Congressional Action, Deficits and Projections, Federal Budget, Federal Tax, Individuals and Families, Process, Taxes and the Economy
As yesterday’s post explained, there are very good reasons why federal agencies don’t use “dynamic scoring” (which considers how proposed tax or spending changes could affect the overall economy) to estimate those changes’ budgetary impact. Applying dynamic scoring to tax reform proposals would be a particularly bad idea.
Given our nation’s projected long-term budget deficits, the single most important goal of tax reform should be to raise substantial revenue, in a progressive manner, as part of a balanced deficit-reduction plan that also includes reductions in projected spending.
If not done carefully, however, tax reform could increase the deficit and threaten the progressivity of the tax code. We previously described one way that could happen: if policymakers specify rate cuts in advance, but not the tax expenditure cuts needed to pay for them. When lawmakers realize the extent of cuts they will have to make in popular tax benefits to finance the rate cuts and raise the desired amount of revenue, they will likely balk — and abandon the revenue target.
Another way that could happen is with dynamic scoring. With it, policymakers could replace real changes in tax policies with speculative revenue gains based on the assumed macroeconomic benefits of tax reform, in which case deficit reduction would again lose out.
Congress should therefore reject proposals to use dynamic scoring to evaluate tax reform, or other proposed legislation.