For many decades, Congress has used static scoring 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. legislation, which assumes taxes have no impact on the overall economy. That is hard to defend, especially among those who were taught in economics that prices matter. This is why there has been a push for 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. which takes into account how taxes affect incentives to work and invest. Dynamic scoring will tell you, for instance, that if tax rates are raised to 100 percent, don’t expect everyone to just keep on working and investing as if nothing happened.
The push for dynamic scoring has been underway for years, dating back to the Kennedy tax cuts. There just hasn’t been much progress. The Joint Tax Committee does use dynamic analysis on occasion, such as for the Camp proposal, but it is used so rarely and so non-transparently that lawmakers can hardly tell what is driving what.
Defenders of static scoring depict dynamic scoring as “Republican math” that will be used to claim tax cuts pay for themselves. It’s true that some tax cuts do not pay for themselves, but some do, such as cutting the corporate tax and other taxes on investment. Our model indicates that cutting the corporate tax rate, for instance, would eventually pay for itself due to increases in wages and income and the fact that most federal tax revenue comes from taxing wages and income.
We do not predict that corporate tax revenue would rise with a corporate rate cut, just that other federal tax revenue would rise. This may be too cautious an assumption, however, given the evidence of major corporate tax cuts across the developed world. Corporate tax rates have dropped roughly in half since 1981 in the average developed country, from about 48 percent to now 25 percent. In those countries with the largest corporate tax rate cuts, corporate tax revenue has increased as a share of GDP. The following charts show the evidence, from the eight developed countries with the biggest corporate rate cuts, based on OECD data.
In all eight of these countries, corporate tax revenue as a share of GDP increased following corporate tax cuts. In two of these countries, the UK and Canada, it appears to be a close call, but further analysis shows there also corporate tax revenue increased after the tax cuts.
Historians critical of dynamic scoring who claim to be part of the “reality-based community” should take note: sometimes tax cuts pay for themselves.
Follow William McBride on Twitter
Share