The GOP’s Political Budget Scorekeeping
The House is using ‘dynamic’ scoring for tax cuts but not for spending. Is consistency too difficult?
By Alan S. Blinder
March 12, 2015 8:10 p.m. ET
Tax cuts have been the lodestar of Republican economic policy ever since the Reagan revolution. The central tenet of supply-side economics is that lower marginal tax rates reduce the disincentive effects of taxation, thereby augmenting the economy’s capacity to produce.
That’s mostly right. But in August 1981, when the doctrine got its initial tryout in the first Reagan budget, the University of Chicago’s Robert E. Lucas, Jr., asked a pertinent question in a New York Times op-ed piece: “Is the general principle being advanced here that taxes must always be reduced, independent of the effect on the deficit, because all taxes have disincentive effects?” Mr. Lucas answered his own question: “This is a nonsense principle.”
Yes, “a nonsense principle” because, even though taxes have disincentive effects, the government needs revenue to pay its bills. In 1981 Mr. Lucas was making the obvious point that while cutting tax rates normally improves incentives, it also increases the budget deficit, which may entail costs of its own. Some weighing of costs and benefits is therefore warranted, rather than claiming that taxes should always be lower than they are.
Fast forward to January 2015. Reveling in their electoral victory, House Republicans returned to Washington and changed official budget scorekeeping rules to favor tax cuts. How? By adopting what is called “dynamic scoring,” a bad idea that is easy to explain by contrasting it with “static scoring,” which was the practice until January.
To estimate, say, the revenue gain or loss from a tax proposal, the Congressional Budget Office and the Joint Committee on Taxation routinely incorporate some behavioral responses. For example, if Congress proposes to reduce the capital-gains tax but maintain the same rate on ordinary income, analysts will assume that people and businesses will rearrange their affairs to produce more capital gains and less ordinary income—but all within the context of an unchanged GDP. That’s called static scoring.
Supply-siders object that such a tax cut would boost GDP growth, thus bringing in more revenue and producing a smaller deficit than static scoring recognizes. By allowing for such effects, dynamic scoring would reduce the estimated revenue losses from tax cuts, thereby paving the way for more of them.
But wait. Don’t some types of government spending raise GDP, too? For example, the 2009 stimulus was intended to make the economy grow faster for a while, and the preponderance of the evidence says it did. So, by the same logic, shouldn’t CBO have scored it as costing less than it did? Or what about more spending on productive infrastructure?
Here is the rub: The new House rule applies dynamic scoring only to taxes and entitlements, not to ordinary appropriations. So a bill to fund more roads, bridges and tunnels would not benefit from dynamic scoring, no matter how much it might contribute to growth.
In addition, the rule limits dynamic scoring to “major legislation,” which it defines as something that moves the budget by at least 0.25% of GDP. That now translates to roughly $500 billion over the standard 10-year scoring window. Many tax bills are that large, but hardly any individual appropriation bills are. In fact, it is hard to even imagine a spending program of that magnitude getting serious attention in Congress. In practice, therefore, dynamic scoring will reduce the estimated budgetary costs of tax cuts, but not of spending proposals.
Here’s an illustration. Imagine a bill that proposes spending more on early childhood education and paying for it with higher taxes, as President Obama has suggested. And suppose, quite unrealistically, that the amounts involved are large enough to qualify as “major legislation.” (The real amounts are not.)
A thick stack of research finds that early childhood investments yield huge returns that boost subsequent GDP and reduce future deficits. But none of that would be scored under the House rule.
On the other hand, the higher taxes that pay for the program would be scored dynamically, which would reduce projected revenue. Thus a program that is budget neutral under static scoring would become a deficit-increaser under dynamic scoring.
Well, actually, it isn’t that simple. Dynamic scoring has so far only been adopted by the House, not by the Senate. So the CBO and JCT would be obliged to score major legislation twice: dynamically for the House and statically for the Senate. The two scores would differ. Then what?
We’ve been down this road before. In 2003 Republicans got the CBO to study what dynamic scoring would mean for President George W. Bush’s budget, hoping it would reduce the price tag on the Bush tax cuts. The CBO, then led by Republican Douglas Holtz-Eakin, applied nine different models to the task. When the supply-side effects turned out to reduce deficits in only four of the nine cases, but increase them in five, political interest in dynamic scoring quickly waned. I guess the interest wasn’t driven by intellectual curiosity—then or now.
Mr. Blinder, a professor of economics and public affairs at Princeton University and former vice chairman of the Federal Reserve, is the author of “After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead” (Penguin, 2013).
That’s mostly right. But in August 1981, when the doctrine got its initial tryout in the first Reagan budget, the University of Chicago’s Robert E. Lucas, Jr., asked a pertinent question in a New York Times op-ed piece: “Is the general principle being advanced here that taxes must always be reduced, independent of the effect on the deficit, because all taxes have disincentive effects?” Mr. Lucas answered his own question: “This is a nonsense principle.”
Yes, “a nonsense principle” because, even though taxes have disincentive effects, the government needs revenue to pay its bills. In 1981 Mr. Lucas was making the obvious point that while cutting tax rates normally improves incentives, it also increases the budget deficit, which may entail costs of its own. Some weighing of costs and benefits is therefore warranted, rather than claiming that taxes should always be lower than they are.
Fast forward to January 2015. Reveling in their electoral victory, House Republicans returned to Washington and changed official budget scorekeeping rules to favor tax cuts. How? By adopting what is called “dynamic scoring,” a bad idea that is easy to explain by contrasting it with “static scoring,” which was the practice until January.
To estimate, say, the revenue gain or loss from a tax proposal, the Congressional Budget Office and the Joint Committee on Taxation routinely incorporate some behavioral responses. For example, if Congress proposes to reduce the capital-gains tax but maintain the same rate on ordinary income, analysts will assume that people and businesses will rearrange their affairs to produce more capital gains and less ordinary income—but all within the context of an unchanged GDP. That’s called static scoring.
Supply-siders object that such a tax cut would boost GDP growth, thus bringing in more revenue and producing a smaller deficit than static scoring recognizes. By allowing for such effects, dynamic scoring would reduce the estimated revenue losses from tax cuts, thereby paving the way for more of them.
But wait. Don’t some types of government spending raise GDP, too? For example, the 2009 stimulus was intended to make the economy grow faster for a while, and the preponderance of the evidence says it did. So, by the same logic, shouldn’t CBO have scored it as costing less than it did? Or what about more spending on productive infrastructure?
Here is the rub: The new House rule applies dynamic scoring only to taxes and entitlements, not to ordinary appropriations. So a bill to fund more roads, bridges and tunnels would not benefit from dynamic scoring, no matter how much it might contribute to growth.
In addition, the rule limits dynamic scoring to “major legislation,” which it defines as something that moves the budget by at least 0.25% of GDP. That now translates to roughly $500 billion over the standard 10-year scoring window. Many tax bills are that large, but hardly any individual appropriation bills are. In fact, it is hard to even imagine a spending program of that magnitude getting serious attention in Congress. In practice, therefore, dynamic scoring will reduce the estimated budgetary costs of tax cuts, but not of spending proposals.
Here’s an illustration. Imagine a bill that proposes spending more on early childhood education and paying for it with higher taxes, as President Obama has suggested. And suppose, quite unrealistically, that the amounts involved are large enough to qualify as “major legislation.” (The real amounts are not.)
A thick stack of research finds that early childhood investments yield huge returns that boost subsequent GDP and reduce future deficits. But none of that would be scored under the House rule.
On the other hand, the higher taxes that pay for the program would be scored dynamically, which would reduce projected revenue. Thus a program that is budget neutral under static scoring would become a deficit-increaser under dynamic scoring.
Well, actually, it isn’t that simple. Dynamic scoring has so far only been adopted by the House, not by the Senate. So the CBO and JCT would be obliged to score major legislation twice: dynamically for the House and statically for the Senate. The two scores would differ. Then what?
We’ve been down this road before. In 2003 Republicans got the CBO to study what dynamic scoring would mean for President George W. Bush’s budget, hoping it would reduce the price tag on the Bush tax cuts. The CBO, then led by Republican Douglas Holtz-Eakin, applied nine different models to the task. When the supply-side effects turned out to reduce deficits in only four of the nine cases, but increase them in five, political interest in dynamic scoring quickly waned. I guess the interest wasn’t driven by intellectual curiosity—then or now.
Mr. Blinder, a professor of economics and public affairs at Princeton University and former vice chairman of the Federal Reserve, is the author of “After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead” (Penguin, 2013).
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