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As TaxVox readers know by now, House Republicans now require the Joint Committee on Taxation and the Congressional Budget Office to include macroeconomic effects when they produce budget scores of major bills. The GOP hoped this would show that tax cuts would generate so much new economic activity that they’d lose much less revenue than traditional budget scoring suggests.
But two recent episodes suggest that dynamic scoring may disappoint even its strongest admirers.
In the first, the Tax Foundation, which advocates for tax cuts, dynamically scored the latest proposal by senators Marco Rubio (R-FL) and Mike Lee (R-UT). The Rubio-Lee plan includes, among other things, major cuts in corporate and individual tax rates, repeal of taxes on capital gains and other investment income, and big new incentives for business investment.
In other words, the plan was specifically intended to boost economic growth. But the Tax Foundation found that it would still lose $1.7 trillion over the next 10 years—the all-important budget window upon which tax bills must be scored. Add in interest costs, and it would increase the debt by $2.3 trillion.
Over time, the fiscal consequences would be different, according to the Tax Foundation. Using its own model, the group concluded that the Rubio-Lee bill would raise revenue by about $94 billion in Year 10 and then increase receipts by a steady 0.5 percent of Gross Domestic Product thereafter.
Even the 10-year score looks much better than a traditional static estimate, which shows an increase of more than $4 trillion in the debt, according to the Tax Foundation model. But it still blows a huge hole in federal finances.
The Tax Foundation assumed no offsetting tax hikes or spending cuts. If Congress did pay for the tax cuts in some way, the effects on growth--and thus revenues--would change in complicated and uncertain ways.
There are other important technical questions about the Tax Foundation model, especially regarding its assumptions about how responsive labor and capital investment are to tax changes. But even assuming that investment is extremely sensitive to these modifications (CBO and many outside economists think the effects are much weaker), the plan still scores as a huge revenue loser over the first decade.
The other instructive story comes from the fate of a House Republican plan to restore and make permanent a now-expired measure to subsidize business capital purchases. Called bonus depreciation, it would allow firms to deduct half the cost of equipment in the year it is acquired. Before the House passed this last year, the Joint Committee on Taxation estimated it would add $287 billion to the debt over 11 years (yes, it scored the plan over 11 years, instead of 10).
That’s enough to trigger the dynamic scoring rule and, according to a nice piece by Aaron Lorenzo of Bloomberg-BNA Daily Tax Report (paywall), that prospect may have scuttled the measure in the House.
The problem is that JCT already did an experimental dynamic analysis of last year’s bill and found only a very small long-run increase in business capital that could offset some of the revenue loss, though most benefits would probably occur outside the all-important budget window.
And that’s a big problem. Until now, Democrats have insisted that any permanent restoration of tax subsidies such as bonus depreciation be paid for. Republicans argued that wouldn’t be necessary once Congress takes into account those growth effects. But if the measure still adds to 10-year deficits even under dynamic scoring….
Rep. Dave Reichert (R-WA), a strong backer of the measure, told Aaron that the problem could sink the measure. “I think that places a question mark over that bill,” Reichert lamented.
As we continue to debate the costs and benefits of dynamic scoring, keep these lessons in mind: Including macroeconomic effects in budget scores may not be the panacea its supporters hope.
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