The debate over dynamic scoring really goes back almost 30 years. Historically, estimates of the revenue effect of tax changes were done by accountants, who simply took the most recent year’s tax data, plugged in the proposed changes and looked at the revenue effect. Then they would try to estimate the impact on future revenues by making some assumptions about growth in the number of taxpayers and the tax base. The estimates were normally done only for a single year.
Eventually, economists replaced the accountants and computers replaced adding machines. More sophisticated methods of estimating inflation, economic growth, employment and other factors were incorporated into the estimates. However, the economists retained one of the accountants’ operating principles: the tax changes were assumed to have no impact on behavior or the economy as a whole. Hence, this method of revenue estimating came to be called static analysis.
One reason for this is that before the 1970s economists didn’t really have the mathematical tools to make a dynamic analysis that incorporated all the effects of tax changes on things like work, saving and investment. Furthermore, there was really no demand for dynamic analysis because the vast bulk of proposed tax changes are too small to have any impact on the economy as a whole.
Another reason is that until the 1970s, most economic thinking was dominated by the theories of economist John Maynard Keynes, who believed that fiscal policy affected the economy only through its impact on disposable income.
Consequently, the incentive effects of taxation was a matter that few economists had any interest in studying.
The great recession of 1973-1975 was a severe blow to Keynesian economics because inflation was high while at the same time there was significant unused capacity in the form of unemployment and idle factories. Theoretically, this wasn’t supposed to happen. Also, the failure of traditional Keynesian medicine, especially the tax rebate of 1975, led economists to search for other causes and cures for economic malaise.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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