David Stockman, President Reagan’s budget manager, introduced the concept of dynamic scoring for tax cuts in 1981. Stockman believed that as income tax rates fell, the economy would grow.
For example, lowering corporate tax rates by 5% would not lose income equal to 5% of corporate profits. On the contrary, the lower rates would stimulate new investment, more production and higher wages, so that the base on which tax rates were levied would increase.
This would at least compensate for a part of the lost income. Stockman believed the 1981 tax cuts would pay off.
An increase in taxes, symmetrically, would not gain as much as the increase in the rate multiplied by the base, because the base would shrink.
This economic concept was baptized at the birth in the water of politics.
When he ran against Reagan, George HW Bush called this concept a voodoo economy. Democrats called it a “runoff” theory – a holdover from Herbert Hoover’s approach to the Great Depression.
Dynamic scoring represents a healthy economy: behavior changes when government moves, and we should try to measure how.
In the $ 3.5 trillion budget reconciliation bill, the Democratic leadership of Congress underwent a major shift in message. They are now adopting dynamic scoring, at least to estimate the effects of new spending.
Federally funded child and family leave, free community colleges, and preschool child care will have such beneficial effects on the economy, the Democrats say, the cost of these programs (and the rest of the package. $ 3.5 trillion) will actually be $ 600 billion. less than the price estimated by the non-partisan Congressional Budget Office.
The tax increases, however, will generate $ 2.25 trillion in revenue regardless of the effect higher taxes will have on slowing the economy, they believe.
Republicans in Congress respond that tax increases will be evaded in part because businesses and individuals wealthy enough to be affected are still hiring accountants and tax lawyers to find ways to do it legally.
They also predict a slowdown in the economy as a whole, as taxation decreases the rewards of entrepreneurial activity. They’re right, but Democrats are also right in pointing out that Republicans have been inconsistent for years ignoring the pro-growth side of new spending that can broaden the base as much as lower taxes do. Democrats have moved from outright condemnation of dynamic scoring to inciting its use to defend new spending. Republicans defend dynamic scoring to demand tax cuts, but ignore it by putting a price on new spending. Both sides are mirror images and neither asymmetry is economically complete.
Dynamic scoring should be attempted when the data allow reasonable estimates – for the effects of taxes or new spending. But this economic truism comes up against a practical problem. The Committee for a Responsible Federal Budget reports that dynamic scoring estimates for new spending in the budget bill range from 2% positive to 2.5% negative.
It is more speculative to estimate the economic gain from, say, universal preschool education, than the change in income resulting from increasing the corporate tax rate from 21% to 26.5%. Dynamic scoring for tax changes was required by the Congressional rule from 1997 to 2018; there is a lot of history from which such estimates of tax effects can be drawn today. There is no such record for any of the new expenses.
For a business, the safest accounting approach is to take the low estimate of revenue and the high estimate of costs. If the government were run the same way, we would price the budget reconciliation bill much higher than $ 3.5 trillion, and we would be pleasantly surprised if it were lower.
However, the worlds of politics and accounting rarely merge, and we risk avoiding the more conservative accounting method because it would favor the more conservative party.
Tom Campbell is Professor of Economics and Law at Chapman University. He served as California’s chief financial officer and congressman for five terms, serving on the Joint Economic Committee. He left the Republican Party in 2016 and is in the process of forming a new political party in California, the Common Sense Party.