The issue of "dynamic scoring" is heating up on Capitol Hill
again. In recent weeks, three different committees in the House of
Representatives have held hearings on it. This alarmed Senate Democratic
leaders, who are trying to prevent the Republican-controlled House from
unilaterally changing the way tax changes are calculated for budget
purposes.
Congress has always needed to know how much revenue would be
lost by cutting taxes or raised by increasing them. In the 1920s, it
established the Joint Committee on Taxation to estimate the revenue effects
of tax changes. Historically, these calculations were made by accountants
using adding machines. They simply looked at the most recent year for which
tax data existed, and recalculated revenues as if a proposed tax bill had
been in effect at the time.
By necessity, therefore, revenue estimates were done on a
"static" basis. That is, they assumed no changes whatsoever in the economy
or taxpayer behavior. Estimators knew that this method produced inaccurate
calculations of how tax changes would really affect federal revenues.
Obviously, people will alter their behavior if their tax situation changes,
and the overall economy may be affected, as well. But until the 1970s, the
tools to do a better job just did not exist.
Eventually, economists replaced accountants at the JCT, and
computers replaced the adding machines. It was now possible to begin
incorporating the economic effects of tax changes into revenue estimates.
However, the JCT resisted changing its methodology and stuck with the old
ways, even though the tools now existed to improve their accuracy.
The JCT stayed with static scoring mainly for political reasons.
Democrats controlled Congress and opposed dynamic scoring, because they
feared that it would make it harder to raise taxes and easier to cut them.
Since it ignores the higher growth resulting from tax cuts and the lower
growth from tax hikes, static scoring systematically overestimates revenue
losses from the former and increases from the latter.
When Republicans took control of Congress in 1995, they were in
a position to implement dynamic scoring. Unfortunately, they did not take
advantage of the opportunity. "Budget hawks" in the Republican leadership
didn't want to use dynamic scoring, because they wanted the revenue loss
from tax cuts to appear as large as possible. Since they planned to pay for
tax cuts with budget cuts, they thought this would lead to larger budget
cuts than would be the case with dynamic scoring.
As a consequence, the same staff were kept on at the JCT who had
been doing static scoring for the Democrats for years. The hawks also
organized a joint hearing between the House and Senate Budget Committees,
the sole purpose of which was to trash dynamic scoring. Although its
supporters were able to amend House rules to allow for it, this rule has
never once been invoked.
Now, a new effort is being made to institute dynamic scoring.
Senate Majority Leader Tom Daschle, D-S.D., and Senate Budget Committee
Chairman Kent Conrad, D-N.D., have responded by writing to JCT Chief of
Staff Lindy Paull, warning her against making any improvements in estimating
procedures. House Ways and Means Committee Chairman Bill Thomas, R-Calif.,
countered by sending her a letter saying she should go ahead and use dynamic
scoring.
Heavyweight economists have also joined the battle. Council of
Economic Advisers Chairman Glenn Hubbard has testified in favor of dynamic
scoring, while Congressional Budget Office Director Dan Crippen has
testified against it. Crippen's position is surprising, given that he is a
Republican appointee.
In my opinion, the argument for incorporating the macroeconomic
effects of tax changes into the revenue estimates for major tax changes is
unassailable. How can anyone in Congress justify consciously and intentional
ly using inaccurate data for important legislative decisions when more
accurate data is easily available?
Democrats fighting dynamic scoring would be on firmer ground if
they argued that a proper dynamic score might not be as favorable to tax
cuts as Republicans suppose. Bill Gale of the Brookings Institution, for
example, recently argued that the 2001 tax bill will reduce growth by
lowering budget surpluses, which will raise interest rates. Thus, he
believes that a dynamic estimate of this legislation might have shown larger
revenue losses than a static score.
I think Gale is wrong because he overestimates the impact of
budget surpluses and deficits on interest rates. But his position is not
unreasonable and one that many economists would agree with. Ultimately,
however, the goal should be to incorporate all the economic effects of tax
changes, both positive and negative, into revenue estimates. Partisan
politics should not stand in the way.
