Ever since the late 1970s, some Washington hands and a few economists have argued that cutting tax rates would increase federal tax revenues – and that “dynamic scoring” would prove it. The argument is that lower tax rates would increase work, saving and investment, and that as a result the economy would grow faster, yielding more revenue, not less.
This refrain has echoed for years, running through all of the tax changes since 1981, and recurring in the years between. And we hear it again today: Proposed tax cuts will reduce, rather than increase, the deficit – if only we take account of the effects on economic growth.
However, the conventional tool of budget analysis – so-called “static scoring,” – assumes that the economy remains unchanged. To the faithful, that sells tax cuts short. Assuming that the economy doesn’t change at all must be inferior to taking changes into account, right? So why, other than politics, would any bozo not use dynamic scoring?
There are fine points, of course. Perhaps the most important is that we do not know whether tax rate cuts induce more work, saving and investment or not. For example, tax rate cuts increase after-tax wages, and so make work more attractive. But tax rate cuts also raise people’s incomes whether they work more or not, making leisure more affordable. So with a tax rate cut and a fatter wallet, will people work more, or less – and so will tax revenue go up, or down? There is no certain answer in theory, only in quantitative research.
We have tried this before. The most recent time was in 2001, with a follow-on in 2003. Today’s proposals have all of the same ingredients as the 2001 and 2003 laws: Income tax rate cuts. Capital gains tax rate cuts. Dividend tax rate cuts. Estate tax rate cuts (including to zero).
So if someone tries to sell you dynamic scoring, just ask yourself one simple question:
If we had used dynamic scoring in 2001, how much lower would the deficit be today?
Hint: Nada. Today’s deficit, and all of the deficits of the last decade, are the product of all of the supply-side power supposedly hidden by the use of static rather than dynamic scoring. History since 2001 is the real scoring of those tax cuts. The deficit is what the deficit is.
There is plenty of blame to go around for our current debt predicament. Not fixing the future growth in healthcare spending is an important contributor to the problem. But past assumed economic growth is another. And from the sound of the current debate, there is a good chance that we could make that mistake all over again. We shouldn’t.