Tuesday, January 16, 2018
Greg Leiserson (Washington Center for Equitable Growth) presents Removing the Free Lunch from Dynamic Scores: Reconciling the Scoring Perspective with the Optimal Tax Perspective at NYU today as part of its Tax Policy Colloquium Series hosted by Lily Batchelder and Daniel Shaviro:
Conventional estimates of the revenue effects of proposed tax legislation assume that the legislation would not change macroeconomic aggregates such as output, the capital stock, and employment. Dynamic estimates relax this assumption and—in the emerging consensus approach—replace it with two alternative assumptions. First, the macroeconomic analysis supporting dynamic estimates assumes future policy changes sufficient to address the fiscal imbalances that exist in CBO’s current-law baseline. These changes are assumed to take effect after the period for which economic results are reported. Second, in many but not all cases, the analysis assumes additional future policy changes that offset any change in the government’s present value fiscal position that the proposed legislation would cause, again taking effect after the period for which results are reported.
This approach to scoring tax legislation severs the link between tax revenue and non-interest spending and thus ignores the primary benefit of raising revenues while highlighting the primary cost. By minimizing the benefits of tax revenues in this way, dynamic scores suggest that tax cuts offer an apparent free lunch. This paper outlines an alternative approach to presenting macroeconomic analyses and the dynamic scores they support that would offer policymakers a clearer illustration of the economic tradeoffs they face.