Former CBO Director Holtz-Eakin on Dynamic Scoring: Revenue Estimating Is Already a Big Guessing Game So Why Stop Now?

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An article in today’s Politico (subscription only) describes plans by congressional Republicans to change the budgeting rules to incorporate “dynamic scoring” of tax proposals should they gain control of the Senate.

Dynamic scoring is a fancy way of claiming tax cuts partly or completely pay for themselves.

This might sound strange to anyone not familiar with the fuzzy math employed by proponents of tax cuts. They rest on the extreme version of “supply-side” economics, promoted most prominently by Arthur Laffer, which claims tax cuts encourage work and investment so profoundly that the subsequent increase in incomes and profits will result in a revenue increase that partly or completely offsets the revenue loss from the reduction in tax rates.

Dynamic scoring is sometimes used to describe a way of estimating the revenue impact of tax proposals that accounts for this supposed effect on the broader economy. The official revenue estimates already do incorporate expected behavioral changes resulting from new tax policies, but not changes to the broader economy, which most economists consider too uncertain to predict.

If tax cuts really did pay for themselves to any significant degree, of course politicians of both parties would rush to enact more of them, knowing there would be little or no cost. But, alas, supply-side economics has been disproven so many times that even most members of Congress can understand the evidence stacked against it. Most famously, a report from President George W. Bush’s Treasury Department failed to find a positive dynamic effect of his tax cuts and concluded that they must be paid for somehow.

But Politico reports that Congress could, nonetheless, start to incorporate these supposed dynamic impacts if Rep. Paul Ryan, who chairs the House Budget Committee and is expected to chair the Ways and Means Committee next year, gets his way. He has long proposed steep tax cuts and has been vague on how he would avoid an increase in the budget deficit.

As several experts quoted in the article explain, there is simply no agreement among economists about how tax cuts affect the broader economy, which makes it impossible to incorporate such effects into an apolitical revenue-estimating process for Congress that is trusted by everyone. In fact, no one really even knows if cutting taxes encourages most people to work and invest more (because they get to keep more of their income) or less (because they can work and invest less and still achieve whatever after-tax income goal they have set for themselves).

Douglas Holtz-Eakin, former director of the Congressional Budget Office and economic adviser to George W. Bush and John McCain, is untroubled by the uncertainty involved. Politico tells us:

Holtz-Eakin recalled being asked to determine how much providing terrorism risk insurance would cost the government, which required him to predict the next terrorist attack. Another time, he said, he was asked to forecast — before the Iraq War even began — how much it would cost to pay $100,000 to the survivors of each soldier killed. “Tell me how to do that,” he said. “There are a lot of assumptions in all of this” and “I don’t think that dynamic scoring is all that different… The mystery surrounding it is overrated.”

Holtz-Eakin’s logic apparently is that because revenue-estimating sometimes involves guesswork, it’s alright if we incorporate a whole lot more guesswork. That’s hardly reassuring.

Perhaps the most damning aspect of the push for dynamic scoring is that proponents refuse to acknowledge the flipside to their logic. If tax cuts increase economic growth by putting money in the economy, then surely government spending could have the same effect. Does anyone really doubt that highways that facilitate commerce or education that provides a productive workforce help grow our economy? If tax cuts grow the economy enough to partly or completely pay for themselves, couldn’t the same be true of federal spending? It’s safe to say you won’t hear Paul Ryan talking about that.

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