Dynamic Scoring

 

Increasing Prosperity Through GDP Growth

Background

Why do I care about Dynamic Scoring? If you pay taxes and care about long term economic growth, you should become familiar with the concept of Dynamic Scoring. Today, Congress projects funding increases from a tax rate change without regard to impacts on incentives and economic behavior. The costs associated with lost incentives can be 17% of lifetime consumption as will be seen in the social security case study. The process of static scoring opaquely measures the impact of tax rate changes. While Static versus Dynamic Scoring may sound arcane at first, they boil down to accurately and transparently measuring tax collections. Just like the Annual Percentage Rate (APR) brings transparency to the true costs of borrowing money, Dynamic Scoring brings transparency to the true costs of government extracting resources from a market economy to fund its functions, operations and transfer payments.

If GDP does not grow or even recedes, resources allocated to public needs will be ultimately constrained. This implies a shift in how a federal budget should be constructed from spending driven to growth driven. One could think of this shift in budget creation in a manner that a typical household constructs its budget. First a level of income is established. Next, allowable long-term (mortgage, retirement) and short-term (entertainment, food etc) expenses are deducted from this income constraint. The remaining funds will be invested, increasing future consumption. Similarly, the federal government should set its income constraint each budget cycle based on a reasonable level of resources extracted from the economy as defined below.

Dynamic scoring transparently determines the level of government funding derived from the economy based on tax rates compatible with good GDP growth. Spending must then be constrained to this limit. Moving tax rates beyond these levels will collect little or no additional income. In fact, should rates be set significantly higher, a Tax Gap will emerge between the tax rate set on static assumptions on a GDP impact and dynamic assumptions on GDP impact. The Tax Gap is the difference between what should apparently be collected based on static rules and actual collections.


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Comments? Please contact the author: jreylin@gsb.uchicago.edu

2006 JR Reyling, All Rights Reserved