Suppose a community wants to build a bridge across a river to connect to the neighboring community. Undoubtedly, the bridge will make the commute better for many people in both the towns. However, the project is estimated to cost $200 million, a pretty high price for the communities. Is the project worth it?
In order to determine this, the two communities utilize a cost-benefit analysis. They estimate the benefits of the project: reduced commute time, easier transportation of goods, and increased economic activity. They then compare the benefits to the costs: the $200 million price tag, possible adverse changes to traffic patterns, and environmental impact. If the benefits exceed the costs, they will decide to build the bridge, otherwise they may scrap or modify the project.
It is important in the process of determining the costs and the benefits of a project to have all the information possible in order to make the best decision. Suppose the city didn’t account for how the construction would affect the river’s fish, thus harming fisherman and the local economy. If they had this information beforehand, they likely would have spent a little more time protecting the river from the bridge’s construction debris.
If the city doesn’t fully account for the costs of the project in its analysis, it could end up building a bridge that has a net negative impact on the communities. Having full information helps avoid some unintended consequences of policy.
This is the idea behind using dynamic scoringDynamic scoring estimates the effect of tax changes on key economic factors, such as jobs, wages, investment, federal revenue, and GDP. It is a tool policymakers can use to differentiate between tax changes that look similar using conventional scoring but have vastly different effects on economic growth. for taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. proposals. Dynamic scoring, in addition to static or conventional scoring, adds more information to the discussion over tax policy so policymakers can make better decisions.
Suppose the government wants to fund a $1 billion infrastructure project that would yield economic benefits. However, the cost of this project is the taxes needed to fund the project. Our current tax scorers at JCT would be able to give a long list of taxes that could be increased by $1 billion: corporate income, capital gains, payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es, excise, or income taxes.
However, the JCT analysis is missing a key piece of information that dynamic scoring could provide: the differing costs of these taxes in terms of their effect on the economy. Due to economic responses, a static $1 billion in corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. es costs more than static $1 billion in payroll taxes.
A dynamic analysis may tell us that the negative effects of an increase in the corporate income tax may negate some or all the potential benefits of an infrastructure project. With that information, policymakers may decide to use a payroll tax increase as a funding mechanism instead because it would be less detrimental to the economy. Dynamic scoring simply gives policymakers more information about the potential costs associated with funding this project.
Any dynamic analysis is subject to assumptions. However, this isn’t a very good reason not to use it. Analyzing the trade-offs in any government project requires making assumptions that need to be justified whether you are evaluating infrastructure spending or an increase (or decrease) in taxes. Taxpayers would be justified in being upset if their government did not use all the available information in evaluating the costs and benefits of any policy change. Dynamic scoring gives us the kind of information on the tradeoffs in tax policy that we demand for so many other government projects.
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