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US Republicans Introduce Dynamic Scoring For Tax Bills

by Mike Godfrey,, Washington

31 December 2014

Kevin McCarthy (R – California), the US House of Representatives's Majority Leader, on behalf of the Republican party, has presented a resolution to the Committee on Rules that would require the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) to apply "dynamic scoring" to major pieces of legislation in the next Congress.

The CBO and the JCT currently use "static" revenue estimating techniques, which make the assumption that tax policy changes – regardless of their magnitude – have no impact on the economy's performance. This methodology has been widely criticized on the grounds that it could provide policy makers with inaccurate numbers and create a bias against lower tax rates.

On the other hand, "dynamic scoring," which is championed by the Republican party, is said to recognize that taxes do affect economic growth. For example, dynamic scoring assumes that higher tax rates would discourage work, saving, and investment, and reduce economic growth, thereby not raising the amount of revenue suggested by static estimates.

Within the adopting rules for the 114th Congress, Republican leaders in the House have therefore added a subsection that requires the CBO and the JCT, to the extent practicable, to incorporate the long-term budgetary and macroeconomic effects – "changes in economic output, employment, capital stock, and other macroeconomic variables" over a 20-year period – into official cost estimates for "major legislation."

The subsection defines "major legislation" as that causing a gross budgetary effect in any fiscal year that is equal to or greater than 0.25 percent of the projected US gross domestic product (GDP) for that year.

Based on a level of US GDP in 2013 of USD16.8 trillion, only tax and appropriation bills having a budgetary effect of around USD42bn would have to be subject to dynamic scoring under the new rule, although the Chairman of the Budget Committee would also be allowed to designate legislation as "major legislation" for its purposes.

Orrin Hatch (R – Utah), who will be the Finance Committee Chairman in the new Republican-led Senate, has previously concurred with this new approach to evaluating major tax reforms, believing that "the expanded and sensible use of dynamic analysis can, if done correctly, be an important tool to help us achieve our goals."

However, he also recognized that dynamic scoring is "not a panacea [as] macroeconomic analysis providing projections of future effects of policy changes are, of course, subject to uncertainties."

Democrats lawmakers, in general, have argued that its adoption would be an attempt to force the CBO and the JCT to provide studies that would support Republicans' efforts to draw attention to the economic benefits of tax cuts.

TAGS: tax | economics | law | gross domestic product (GDP) | budget | legislation | tax rates | United States | tax reform | regulation | legislation amendments | Tax

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