Tax Reform Testing Methods Matter : Dynamic 'Scoring' Best

Cutting through the weeds a little here - what is important is using the best method to test each proposal, scoring, to determining what each scoring method might bring in the way of economic benefits.

After all it's just that, a score or dynamic system to help judge the effectives of each plan.

Dynamic Scoring Is Crucial in Comprehensive Tax Reforms
Source: Scott A. Hodge, "Dynamic Scoring Made Simple," Tax Foundation, February 11, 2015.

March 4, 2015

The Taxes and Growth (TAG) dynamic tax model is designed to isolate and measure the effects of tax changes on the cost of capital and on the cost of labor, which are the two main drivers of economic growth. It is comprised of two main components - a tax simulator and a macroeconomic model. These two components of the model work together to calculate the dynamic effects of tax changes. The model can simulate the effects of the tax changes on key economic factors as well as important factors in the fiscal debate.

Using the TAG model to compare five different illustrative tax cuts had a conventional revenue cost of $72 billion annually. Those illustrative tax cuts are:

• a new $1,000 per-child tax credit with no upper income cap;
• cutting the tax rate in the 10 percent tax bracket to 3.5 percent;
• cutting the rates in the top three individual income tax brackets (33, 35, and 39.6 percent) to 29.2 percent;
• cutting the corporate income tax rate from 35 percent to 24 percent;
• and moving from the current "accelerated" depreciation system (MACRS) to full expensing for all capital investments including machinery and structures.

The results show that:

• On GDP growth, all of them will boost the level of GDP, except the new $1000 per child tax credit, which produces no growth. Moving to full expensing for all equipment and buildings would achieve the greatest growth among the five, raising the level of GDP by more than 5 percent.
• On Federal revenues, even though the static estimates are the same, the dynamic revenue estimates are very different. Cutting the Federal CIT rate from 35% to 24% and moving to full expensing can generate more new tax revenues than they lose over time, $11 billion and $106 billion separately, while others have a cost from $72 billion to $48 billion.

Different tax increases generate different results by the TAG model. The dynamic models also can provide the second layer of information about the distributional impact of tax changes on families in different income groups.

The primary goal of comprehensive tax reform is economic growth. Conventional scoring treats this process as an exercise in arithmetic, whereas dynamic scoring makes the process an exercise in economics. Only dynamic scoring can help lawmakers make the right choices that lift everyone's standards of living.