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Pro-growth Tax Reform Needs Dynamic Scoring

2 min readBy: Andrew Lundeen

The goal of any 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. reform should be to maximize economic growth. Tax reform does this through creating a system that limits economic distortion and removes incentives against saving and investment. The current way Congress evaluates tax reform plans ignores the effect taxes have on the economy.

Yesterday the Tax Policy Center posted the results of a recent Joint Committee on Taxation estimate of a commonly mentioned tax plan:

Last week, the congressional Joint Committee on Taxation estimated that a tax plan that cuts individual rates to 10 percent and 25 percent and repeals the Alternative Minimum Tax would add almost $3.8 trillion to the budget deficit over 10 years. A plan to cut the corporate rate to 25 percent and repeal the corporate AMT would add another $1.3 trillion to the deficit.

This past spring the Tax Foundation ran a similar plan (Rep. Ryan’s tax plan) through our model. The plan cut rates to 10 and 25 percent; lowered the corporate tax rate to 25 percent; and eliminated the Obamacare HI Surtax, the Obamacare Investment Income Surtax, and the alternative minimum tax.

The Tax Foundation found that this type of plan would increase GDP by $992.9 and wages by 3.96 percent, while leaving a greater deficit of only $207.1 billion in the final year.

The separate set of results are so different because the JCT model fails to account for economic growth, where the Tax Foundation's model does. The Joint Committee on Taxation uses a type of 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. model to complete its estimates for tax proposal. The Tax Foundation uses a dynamic model that accounts for the impact of taxes on the decisions of individuals and business and the subsequent effect on economic growth.

We use this type of model to gain a more accurate look at the way the economy responds to taxes and to help ensure that tax reform leads to greater economic growth and personal prosperity.

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