Academic journal article Brookings Papers on Economic Activity

"Dynamic Scoring": Why and How to Include Macroeconomic Effects in Budget Estimates for Legislative Proposals

Academic journal article Brookings Papers on Economic Activity

"Dynamic Scoring": Why and How to Include Macroeconomic Effects in Budget Estimates for Legislative Proposals

Article excerpt

IV.C. Potential Bias toward Tax Cuts Relative to Spending Increases

A further concern is that applying dynamic scoring to proposals affecting federal taxes but not proposals affecting federal spending would distort policymakers' decisions in favor of tax cuts relative to spending increases. For example, if lower tax rates raise output by increasing labor supply, and greater infrastructure spending raises output by increasing the capital stock, then including the former effect in official budget estimates but excluding the latter effect would inappropriately encourage tax rate cuts relative to infrastructure spending increases. That concern is, in some ways, the opposite of a concern about the conventional approach to cost estimates, namely that excluding effects on labor supply tends to overstate the budgetary cost of tax cuts and understate the budgetary cost of benefit increases, thereby encouraging policymakers to increase taxes and benefits. In any event, the concern can be addressed by applying dynamic scoring to proposals that change spending as well as those that change revenues.

Indeed, as described earlier, CBO's analyses of macroeconomic effects include the effects of federal spending on the demand for goods and services, the effects of federal benefits on labor supply, and the effects on the economy of federal investments in infrastructure, education and training, and research and development. (19) For example, CBO's annual economic analysis of the President's budget incorporates the effects of proposed changes in both spending and taxes. In addition, the estimated effects of the ACA on labor supply stem partly from changes in the tax code and partly from changes in spending for Medicaid (as well as some other aspects of the law), and those effects are treated in a completely parallel manner in the estimates.

Nonetheless, there are two obstacles to the goal of applying dynamic scoring equally to federal spending changes and tax changes. One obstacle is that the congressional budget process treats certain types of spending differently from other types of spending and revenues. Roughly a third of noninterest federal spending arises from annual appropriations by Congress (sometimes called "discretionary spending"), with the remaining roughly two-thirds reflecting payments for ongoing benefit programs (sometimes called "mandatory spending"). Appropriations are currently split about equally between defense and nondefense purposes, and about half of nondefense appropriations go to investments in infrastructure, education and training, and research and development. The Congressional Budget Act of 1974--which established CBO, the House and Senate Budget Committees, and many of the ground rules that govern the budget process--specified that CBO should not produce estimates for appropriations bills that are comparable to those it produces for other legislation, but instead should tally the amounts specified in those bills and provide those tallies to the appropriations committees. Potential implications of appropriations for future tax revenues or benefit payments are not considered in that tallying process or in the subsequent legislative process. Perhaps because of that different procedural treatment, appropriations bills are excluded from the requirements for dynamic scoring in the new House rule and in the congressional budget resolution.

Moreover, if dynamic scoring were applied only to proposals with a significant budgetary impact (excluding macroeconomic effects) relative to the baseline, as recommended above, few appropriations bills would meet that criterion. The baseline for appropriations equals the previous year's appropriations adjusted for inflation, or the statutory cap if one exists. Actual appropriations in a single year rarely differ from the baseline by an amount that exceeds a quarter of a percent of output over the coming decade, with the most recent exception being the one-time burst of appropriations under the 2009 stimulus bill. …

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