On Monday, Republican staffers leaked that CBO director Doug Elmendorf likely won't be reappointed to lead the budget scorekeeper. The reason? The GOP wants someone who will use "dynamic scoring"—the idea that tax cuts, in part, pay for themselves—to head it. This marks the end of a long-running debate within Republican circles about whether they'd be better served by re-nominating Elmendorf, a well-respected and impartial Democrat, or by changing how the CBO does business with one of their own. So as we explored in October, here's how big a difference dynamic scoring would mean for the CBO.
Tax reform is supposed to be simple, but the math isn't. Far from it, in fact.
That's because it isn't easy to cut tax rates and tax loopholes without also cutting tax revenues. And that last part, remember, is just as important as the rest: yes, it's about lowering rates and broadening the base, but also keeping the same amount of money coming in. It's the age old problem of politicians wanting their dessert without their vegetables. They want to cut tax rates, but not the big tax deductions, like for home mortgage interest, that could pay for it all.
And that's why, in a recent speech at the Financial Services Roundtable, Paul Ryan said he wants to make our budget scorekeepers, more realistically in his view, assume that tax cuts pay for themselves -- at least to some degree. It's part of what economists call "dynamic scoring," and it would make the math of tax reform much less daunting. But Democrats, of course, think it's just a magic asterisk devised to make budget-busting tax cuts appear more palatable. So who's right?
Well, it's true that dynamic scoring has a long and embarrassing history. It started with the "charlatans and cranks," as former Bush adviser Greg Mankiw called them, who told Reagan that his tax cuts would actually increase tax revenues by boosting growth so much. That didn't happen. Instead, lowering rates had the what-should-have-been-predictable effect of lowering revenues, so much so that ballooning deficits quickly became a problem. But this wishful thinking masquerading as economic analysis was nothing compared to what the conservative Heritage Foundation came up with in 2001. It calculated, and I use that term lightly, that the Bush tax cuts would pay off the national debt.
Yes, you read that right.
But dynamic scoring isn't all voodoo. Indeed, the Congressional Budget Office (CBO) already occasionally uses it. The CBO does look, contra Ryan, at how much changes in taxes affect people's behavior, like with the effect of capital gains on investment decisions. It also looks at how much changes in immigration would change growth when it calculates its effect on the budget. Dynamic scoring, in other words, isn't just about how much tax cuts pay for themselves. It's about how much a policy's consequences change its costs. And, as former CBO director and McCain adviser Douglas Holtz-Eakin told me, this can "bring important information to policymakers," since, in the case of "two proposals that have the same static score," it might turn out that "one causes faster long-run growth and the other causes slower growth."
There are some practical reasons, though, why it doesn't make sense to use dynamic scoring all the time. For one, it would simply take longer for the CBO to crunch the budgetary numbers using its more complicated dynamic models. For another, these dynamic estimates would only be able to look at how much a bill cost in total, and not provision-by-provision. That's because it's hard enough to figure out the macroeconomic effects of a whole bill, let alone its constituent parts — so we wouldn't be able to zoom in on what exactly costs what in each piece of legislation. Finally, the CBO likes to give ranges for its dynamic scores to underscore their increased uncertainty, which limits some of their usefulness. And there's nothing it can do about that.
Take tax cuts, for example. How much they pay for themselves depends on how much and what kind of taxes are getting cut, and whether there are offsetting spending cuts to prevent deficits and interest rates from rising. In other words, it's complicated.
That leaves us with one last question: how big a deal would this even be? Well, as Holtz-Eakin told me, it wouldn't change budget impacts "dramatically," since dynamic scoring would probably only assume "the growth rate of the economy is affected by 0.1 to 0.3 percentage points." This, as he put it, would "not change the shape of the Western Hemisphere." But it could change the shape of the fiscal debate. Let's go back to tax reform. Dave Camp, the Republican head of the Ways and Means Committee, put forward his own plan that was revenue neutral without any kind of big dynamic effects. The CBO said—in footnote 42 on page 30—that, if it had used dynamic scoring, this would have increased its revenue estimate by 0.5 percent of GDP. That's real money, but not a crazy amount.
The math of tax reform, in other words, still wouldn't be easy.