New Revenues Should Be Real, Not Based on “Dynamic Scoring”

House Speaker John Boehner (R-OH) said this week that he was open to additional revenues as part of a deficit-reduction agreement, but only “under the right conditions” — not through higher tax rates but “as the byproduct of a growing economy, energized by a simpler, cleaner, fairer tax code.” If he’s suggesting “dynamic scoring” to estimate the budgetary effects of tax reform, that would be a bad idea, as we have explained.

There are good reasons why the Congressional Budget Office and other federal agencies don’t try to measure whether (and by how much) a change in tax or spending policy would affect the overall economy, such as its impact on economic growth — which, in turn, would affect revenues.  Estimates of the macroeconomic effects of tax changes are highly uncertain.  Economists do not agree on the size of macroeconomic impacts from reducing marginal income tax rates or other tax changes.  But, they would likely be small, according to most studies — and not have large enough effects on revenue estimates to justify the problems that dynamic scoring would create.

Given our nation’s 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 expand deficits and threaten the progressivity of the tax code.  One way that could happen is if policymakers embrace dynamic scoring, which would enable them to replace real changes in tax policies with speculative revenue gains based on the assumed macroeconomic benefits of tax reform.