Responding to comments by Rep. Paul Ryan of the need for reality-based scoring of fiscal policy, the liberal blogosphere has launched a full-scale campaign to discredit Ryan for attempting to force the Congressional Budget Office (CBO) to use “special GOP math” to justify 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. cuts. The campaign was capped by New York Times columnist Paul Krugman, who apocalyptically wrote that should Ryan succeed in pushing 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. , it “would destroy the credibility of a very important institution, one that has served the country well.”
As so often happen with these orchestrated “viral” campaigns where everyone is working off the same talking points, the rhetoric tends to outrun the facts. Let’s start with the simple fact of which Congressional agency performs what function: The Joint Committee on Taxation (JCT) is in charge of modeling and scoring tax bills while the job of the CBO is to model and score spending bills. But the biggest oversight that Krugman et.al. make is ignoring the fact that the institutions they want to protect from Republican math have actually performed dynamic scoring over the past few years, and some of these liberal bloggers likely cheered the results.
CBO’s Dynamic Scoring of the Senate Immigration Bill
Notably, many liberal bloggers probably applauded when the CBO determined that the Senate immigration bill (S. 744) would be a net benefit to both the federal budget and the U.S. economy. CBO estimated the bill’s provisions would increase the number of workers in the U.S. by 10 million by 2023, which would not only boost tax revenues but it would place additional demand on government programs. However, the net effect, CBO determined, would be lower federal deficits because the new tax revenues would outpace the additional outlays.
For the broader economy, CBO determined that the increased labor force from higher immigration would produce an interesting sort of supply-side effect in boosting GDP. As CBO Director Doug Elmendorf described the effect in a March 2014 blog:
“That boost would be partly the direct result of more workers. In addition, the increase in the number of workers would make the existing stock of capital relatively scarce (compared with the number of workers) and thus encourage businesses to undertake more capital investment, which would raise GDP as well.”
JCT’s Dynamic Scoring of Tax Reform
Speaking of the economic consequences of capital investment, most liberal bloggers probably ignored the JCT’s dynamic analysis of the tax reform draft developed by Ways and Means Chairman Dave Camp. Although Tax Foundation economists expressed some concerns about the underlying assumptions of JCT’s models, the exercise was very instructive in illustrating the limitations of revenue neutral tax reform and showing why dynamic scoring is key to achieving tax reform that is pro-growth and lifts workers’ wages.
The worry many critics of dynamic scoring have is that it will be misused to justify tax cuts that are not “paid for” and, thus, “bust the budget.” While it is true that some advocates of dynamic scoring have made it sound as though all tax cuts pay for themselves, the value of dynamic scoring is that it helps us understand the different degrees to which different tax policies affect the economy. Some policies may have a marginal effect on the economy while others may have a substantial impact the economy—this goes for both tax cuts and tax increases.
But one of the real values of dynamic scoring, as the JCT study shows, is that it allows us to understand the impact of the tradeoffs that have to be made if lawmakers strictly adhere to the notion of revenue neutrality. In order to avoid “busting the budget,” Camp decided that his plan would be revenue neutral as scored on a conventional, or static, basis. This required him to offset the statically scored loss of revenues from cutting corporate and individual tax rates with the elimination of various tax preferences or new taxes on specific industries (such as a new bank tax).
Dynamic Analysis Explains Why Camp Draft Produced Little Growth
As a result of these choices, the Camp plan produced very little growth over ten years—between 0.1 percent and 1.6 percent additional economic growth according to the two different dynamic models JCT used to assess the plan. And while the individual rate cuts were found to induce many new workers to enter the workforce, which JCT determined would boost GDP, the various business offsets in particular raised the cost of capital and tempered the overall growth potential of the plan.
As John Buckley, Former Chief Tax Counsel, Committee on Ways and Means, and Former Chief of Staff of the JCT, wrote in his July 2014 testimony before Congress:
Because of the net increase in business taxes, the JCT concludes that the Camp proposal overall “is expected to increase the cost of capital for domestic firms, thus reducing the incentive for investment in domestic capital stock.” The increased cost of capital will not be uniform for all businesses. Businesses, like many manufacturers, that are capital intensive or have large research costs would see the largest increase in the cost of capital.
On this point, the JCT report states:
The reduction in statutory tax rates on corporate and non-corporate business income increases the after-tax return to investment for some businesses that do not make use of many of the business deductions under present law. For those businesses that do make use of accelerated depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. , expensing of research and experimentation expenses, or other business tax expenditures, the elimination of these provisions is expected to reduce the after-tax return on investment. Overall, the proposal is expected to increase the cost of capital for domestic firms, thus reducing the incentive for investment in domestic capital stock.
More People Working at Lower Wages
As the Tax Foundation’s dynamic analysis of the Camp draft found, the increased cost of capital means that people would be working longer but producing less total output with less capital. In turn, this would lead to more people working at lower wages.
The goal of tax reform should be to boost economic growth, but in a way that increases wages and living standards for American workers. Conventional scoring techniques not only can’t give lawmakers that kind of information, it actually leads them to make decisions that run counter to the interests of workers.
Those who seek to denigrate dynamic scoring are effectively impugning the one tool that can give lawmakers the information they need to make policies that make all Americans better off. There is something very wrong about that.
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