At last week’s hearing before the Joint Economic Committee, Federal Reserve Chairman Ben Bernanke was bombarded with questions from politicians on both sides of the aisle with regards to the economic consequences of 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. policy. This included questions regarding the possible use of 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. when evaluating the economic and revenue impacts of changes in tax policy. Within this overarching issue, Bernanke was also asked specifically his view on whether or not tax cuts lead to revenue increases. Here are some excerpts from that hearing on these topics:
On Dynamic vs. Static ScoringStatic scoring (conventional scoring) is an estimation method that, unlike dynamic scoring, assumes that tax changes have no impact on taxpayer behavior and thus have no effect on important macroeconomic measures like GDP, investment, and jobs. This provides a one-dimensional perspective about the effects of tax changes. :
I’ve addressed in a recent letter the issue of dynamic versus static scoring. To the extent that tax cuts, for example, promote economic activity, the loss in revenues arising from the tax cut will be less that implied by purely static analysis, which holds economic activity constant.
There is currently an important and interesting debate going on to the extent to which so-called dynamic scoring should be used in the Congress. I don’t want to come down with a definite recommendation when the issue is that any dynamic scoring model requires some assumptions about what theory, what model you’re going to use to make the assessment.
And, therefore, you’re going to have to look at different alternatives in coming up with an outcome.
But I do think it’s worth considering an alternative range of scoring mechanisms to give Congress a sense of what the possible outcomes would be on the revenue side from different tax changes.
On the issue of whether or not tax cuts can increase revenue:
I don’t think that, as a general rule, that tax cuts pay for themselves.
What I’ve argued, instead, is that to the extent that tax cuts produce greater efficiency or greater growth, they will partially offset the losses in revenues. The degree to which that offset occurs depends on how well designed the tax cut is.
On overall fiscal policy:
I would say that if you are one of those who supports low taxes, that you also have to accept the implication that spending also has to be controlled in a commensurate way, whereas if you are in favor of a higher, larger government, then you have to accept the corollary that taxes have to be higher.
And finally, Bernanke on the need for stability in the tax code (answering a question from Rep. Paul Ryan relating to dividend tax policy):
Well again, I don’t want to make a definite recommendation. The specifics of the dividend tax extension, for example, would involve not only considerations of efficiency, but also considerations of equity and revenues.
But looking strictly at the efficiency side, clearly more certainty about the tax code — and I think this applies to any tax regulation — when people know the tax rules are going to be stable, they’re going to have stronger effects and more positive effects than if they are worried that they’re going to be changing from year to year.