When the Congressional Budget Office and similar entitities churn out their projections on how much revenue a tax policy change will bring in, they often assume that the change won’t have an impact on the economy. This is called “static scoring.” Under static estimates, tax increases necessarily bring in all the expected revenue without damaging the economy while tax cuts are scored as revenue losers without accounting for how they might help the economy grow faster.
The alternative is “dynamic scoring,” which takes into account the fact that the revenue losses from pro-growth tax cuts will be at least partially offset by faster economic growth and the revenue gains from tax increases can be at least partially diminished by slower growth. While the assumptions behind static scoring are demonstrably false, Josh Barro correctly notes that dynamic scoring can be too optmistic about the amount of growth a tax cut will stimulate.
Why does this matter? Throughout the presidential campaign, both parties will be throwing out numbers as to what their tax proposals will do to the long-term budget picture and the economy. Those numbers will be based on static and dynamic estimates. Mitt Romney’s plans will be based in part on the Paul Ryan blueprint, which balances the budget faster under some dynamic scores and assumes that maintaining the historic tax burden will lead to more rapid economic growth. Barack Obama is assuming that higher taxes are compatible with robust growth.
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