he 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
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 is 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.