The Independent View: Republican New Math is Dynamic Scoring

Republicans are getting ready for the chance to make radical changes in Congress’ budgeting rules aimed at making it easier to cut taxes.

As they prepare to take full control of Congress, Republicans say they will make long-sought changes in how the likely cost of tax legislation is determined. They say the new rules, known in budget circles as “dynamic scoring,” will provide a fairer picture of the impact of tax cuts.

But there are plenty of risks for Republicans, because asking experts to analyze the economic impact of tax cuts raises the possibility that they won’t find much.

“It doesn’t always work out for everybody involved,” said Will McBride, chief economist at the conservative Tax Foundation. “Some things that are very popular don’t have much of an economic effect.”

Adopting so-called dynamic scoring has been a holy grail for Republicans going back to the days of Arthur Laffer’s famous economic theory-making on a bar napkin. Laffer later advised Ronald Reagan.

The idea is that cutting taxes unleashes economic growth, which in turn produces additional revenue. Republicans want to count that extra revenue against what the Treasury loses when Congress hands out tax cuts. That would reduce the hit to the budget, making it easier to push tax cuts through Congress. Incoming House Ways and Means Chairman Paul Ryan (R-Wis.) calls it “reality-based scoring.”

The effort, which Ryan is leading, aims to make it easier to finance what Republicans hope will be a once-in-a-generation overhaul of the Tax Code.

Democrats accuse Republicans of trying to cook the books, and risk ruining the hard-won credibility of Congress’ independent scorekeepers, in an ideological crusade to cut taxes.

The bid is being driven in part by the failure of the outgoing Ways and Means Committee Chairman Dave Camp (R-Mich.) to make good on long-standing promises to present a tax reform plan that cut the top individual tax rate to 25 percent. Camp, unable to make the math work, was forced to settle for 35 percent, just 4 percentage points below the current top rate, and part of an overhaul plan released in February. Republicans believe dynamic scoring will make it much easier to finally reach 25 percent.

Some also want to replace Congressional Budget Office ("CBO") Director Douglas Elmendorf, though it’s actually another office, the Joint Committee on Taxation ("JTC"), that analyzes tax bills. The two offices, both stocked with Ph.D. economists, share responsibility for putting price tags on lawmakers’ legislative dreams, with JCT focused on taxes and the budget office handling the rest.

Democrats scoff at the entire effort, saying the economic implications of bills are impossible to accurately forecast.

“Any effort by Republicans to interfere with the professional integrity of the CBO by selecting someone to push their failed ‘trickle down’ economic theory of tax cuts for the wealthy through dynamic scoring would undermine the credibility of CBO and the entire budget process,” said Rep. Chris Van Hollen (D-Md.), the top Democrat on the House Budget Committee.

Sometimes lost in the often heated debate is the possibility that Republicans will be disappointed by dynamic scoring, just as they are sometimes confounded by scorekeepers’ current budget estimates.

Ryan acknowledged that, even if scorekeepers adopt the new methods, they still may not always tell Republicans what they want to hear.

“As a policymaker, I want to know whether my policies stand a better chance of growing the economy or not,” said Ryan. Right now, “we don’t get any answer and you’re just flying blind.”

Though the government does not currently use dynamic scoring, House rules require the joint tax panel to produce such analyses for tax bills as supplements to its conventional revenue estimates.

Those reports suggest dynamic scoring may not always be the windfall Republicans are expecting.

For example, JCT’s analysis of Camp’s tax reform bill suggests lawmakers may be overstating the likely economic benefits of reforming the business side of the Tax Code.

It found that while Camp’s plan would boost the economy between 0.1 percent and 1.6 percent, producing from $50 billion to $700 billion in extra “dynamic” revenue, the proposal’s business section would probably increase the costs of investments, a key ingredient of economic growth.

That’s because Camp took away so many narrow tax breaks, most notably accelerated depreciation, in order to finance his rate cuts, that taxes on new investments would actually go up.

“On net, the after-tax return to business capital is reduced relative to present law by these changes overall,” JCT wrote.

That’s a clear warning to lawmakers now considering a corporate-only tax overhaul that the effort may have only a mixed impact on the economy, said Alan Viard, an economist at the conservative American Enterprise Institute.

If lawmakers look to the same pay-fors as Camp, and as one of the largest corporate tax breaks, accelerated depreciation is a fat target, they’ll likely find the economic benefits of their plan will be similarly muted, said Viard.

Other dynamic analyses by JCT suggest it is harder to boost the economy via tax cuts than many Republicans may believe.

In May, then-House Majority Leader Eric Cantor (R-Va.) said a Republican plan to extend a corporate research tax break is “one of the most generative things we can do from a policy standpoint” to “grow jobs and to have America work again for more people.”

But the joint tax panel said only that while the bill “could” spur companies to increase research expenditures “by up to 10 percent,” it’s hard to draw a line from that to economic growth. Just because a company spends a dollar investigating something doesn’t mean it necessarily boosts overall growth. “It is difficult to find objective measures of productivity, and of the stock of knowledge created by research expenditures,” JCT said in its analysis of the plan.

Rep. Charles Boustany (R-La.), a member of the Ways and Means Committee, said he was not surprised that some tax bills would have a limited impact on the economy. While some of the measures may appear large compared with the government’s $500 billion budget deficit, they’re often quite small compared with the $17 trillion U.S. economy.

“A lot of times, smaller provisions just won’t trigger enough of an economic impact to give you a dynamic score,” he said.

I have said for awhile now, that in the 21st Century, we need new data points in the CBO's calculations, bur Dynamic Scoring is not the answer.

No where in their calculations do that take into account our current underground and barter economy.