Conventional scoring (static scoring) is a method of estimating the revenue effects of tax policy while holding nominal national income constant. In other words, conventional scoring uses an assumption that tax changes will not impact the overall size of the economy. Because of this assumption, conventional scoring does not provide a complete picture of how a tax change will affect revenues because it ignores changes in work and investment.
How Does Conventional Scoring Work?
Conventional scoring measures the changes in government revenue from a tax policy change while holding nominal national income constant. It can incorporate certain behavioral effects (like a reduction in cigarette purchases under a higher excise tax) and offset effects (like a mechanical reduction in income and payroll tax revenues under higher indirect taxes), but it does not incorporate how the overall size of the economy may be affected by tax policy changes.
By assuming that the overall size of the economy stays fixed in response to tax policy changes, conventional scoring provides an incomplete picture of how tax policies affect revenues. Taxpayers usually alter their behavior in response to changes in marginal tax rates. So when tax policy changes, it can affect work, investment, and saving decisions, which create additional effects on tax revenues.
Dynamic scoring relaxes the assumption that the economy stays the same when tax policy changes, so it incorporates the macroeconomic effects of tax policy, giving policymakers a tool to differentiate between tax changes that look similar using conventional scoring methods but have vastly different effects on the economy. For example, two tax policies that raise the same amount on a conventional basis, such as a value-added tax and an income tax, will not look the same on a dynamic basis. A value-added tax has a smaller negative effect on economic output and so would raise more on a dynamic basis than a similarly sized income tax increase.
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