What is 'Dynamic Scoring'

A measure of the impact that proposed tax budgets would have on the budget deficit and the overall economy over time. Dynamic scoring is one of two models used by the Tax Foundation that accounts for how fiscal policy changes indirectly affect macroeconomic measures like GDP and employment in the long term.

The second model, static scoring, measures the immediate and direct change to spending, revenue and the deficit due to new fiscal policies.

BREAKING DOWN 'Dynamic Scoring'

Dynamic scoring follows supply-side economics, which states that supply is the primary driving force behind an economy’s growth. When capital and labor are supplied, demand is created. Tax increases on a worker’s wage affects the amount of labor that he provides. The worker will work less, save less, and invest less. On the other hand, tax cuts mean more disposable income for the worker who would in turn work longer and harder, and save and invest more money, thereby stimulating economy growth. The effects on costs of labor and capital due to a tax change are calculated using the dynamic model, after which the effect on other economic factors like GDP, employment, and federal revenues are taken into account.

The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) work closely with Congress to forecast the country’s surplus or deficit due to fiscal changes in a proposed budget. These offices historically used static scores to outline the direct effect of new tax laws on spending, revenue, and the budget. In 2015, House Republicans passed a law that required the CBO and JCT to use dynamic scoring for major legislation. For example, the CBO evaluated President Barack Obama’s budget for fiscal year 2013 by calculating where the deficit would be after its impact on GDP is factored in. The dynamic score showed that the GDP, due to the proposed budget, will change between 1.4% and -0.2% from 2013 to 2017, boosting demand, and between -0.5% and -2.2% from 2018 to 2022, hurting private investments.

While republicans believe that tax cuts will contribute largely to the growth of the economy and use dynamic scoring to support their claims, liberals and opponents argue that dynamic scoring is a biased measure and will only encourage tax cuts and increase the country’s deficit in the long run. In 2003, President George W. Bush cut taxes on salaries and investment income but still maintained a huge deficit. So while the supply side benefit of tax reduction increased the amount of labor, savings, and investments, the high deficit increased interest rates in the economy. The Tax Policy Center’s dynamic analysis on President Donald Trump’s 2016 plan to cut taxes for businesses and individuals showed that the increase in supply of labor and capital that ensues will eventually be offset by the reduced investments from a higher budget deficit.

Example of dynamic scoring

The following is a very basic example of how dynamic and static scoring are interpreted. If income tax for a certain worker was cut from 30% to 25% and she earns $100,000 per annum, federal revenue produced is reduced to $25,000 from $30,000. Because the lower tax rate cost the government $5,000 in lost revenue, static analysis states that the tax cut will have no impact or change in how the worker behaves. Dynamic scoring assumes that the lower tax rate will lead to higher disposable income which creates an incentive for the individual to work, save, and invest more money. The increase in the worker’s financial activity will create additional income for her of say, $100,000, which is also taxed at 25%. The government receives an inflow of $25,000 which fully or partially offsets the initial cost.

Although dynamic scoring is in its infant stages where there are no set processes on the assumptions used in creating the dynamic model, it is still considered a valuable tool for policy makers to evaluate the trade-offs in tax changes and policies that would achieve their goal better.

RELATED TERMS
  1. Budget Deficit

    A budget deficit occurs when expenditures exceed revenue. The ...
  2. Fiscal Deficit

    When a government's total yearly expenditure exceeds its yearly ...
  3. Market Dynamics

    Market dynamics are the pricing signals that are created as a ...
  4. Dynamic Momentum Index

    The dynamic momentum index is used in technical analysis to determine ...
  5. Bush Tax Cuts

    The Bush tax cuts are a series of temporary income tax relief ...
  6. Trumponomics

    Trumponomics is a term for the economic policies of President ...
Related Articles
  1. Investing

    US Budget Deficit to Top $1 Trillion by 2020: CBO

    The budget office estimates the tax overhaul to cost $1.9 trillion over 10 years.
  2. Taxes

    What's Wrong with the American Tax System

    American's are highly taxed and we still run a deficit. We explain why.
  3. Insights

    The Current State of the U.S. Debt

    Discover the current state of U.S. national debt, whether it's increasing or decreasing, and what is projected for the next 10 years.
  4. Investing

    General Dynamics Trades Ex-Dividend Wednesday

    General Dynamics will send its dividend payment on May 5 to shareholders of record as of April 7.
  5. Taxes

    Trump Signs Tax Reform Bill

    The president signed the GOP's overhaul of the federal tax code into law.
  6. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  7. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  8. Insights

    The Pros & Cons of a Trade Deficit

    Is a trade deficit, also known as a current account deficit, beneficial or detrimental to a country's economy?
  9. Insights

    Why Deficits Are Flawed Measures of Unfair Trade

    Trump’s obsession with erasing the $500B U.S. trade deficit is flawed economics, experts say.
  10. Personal Finance

    Current Account Deficits: Government Investment or Irresponsibility?

    Deficit can be a sign of trouble for some countries, and of health for others. Find out what it means when more funds are exiting than entering a nation.
RELATED FAQS
  1. Which countries run the largest budget deficits?

    Discover the countries with the largest budget deficits and what it means. Deficits are influenced by the economy and also ... Read Answer >>
  2. Which U.S. presidents have run the largest budget deficits?

    Take a look at which presidents were in office for the largest budget deficits in U.S. history and how the responsibility ... Read Answer >>
  3. What is the role of deficit spending in fiscal policy?

    Read about the role deficit spending can play in a government's fiscal policy, and learn why economists are torn about the ... Read Answer >>
  4. What is the difference between a current account deficit and a trade deficit?

    Learn the meanings of the macroeconomic terms "current account deficit" and "trade deficit," and understand the differences ... Read Answer >>
  5. How long has the U.S. run fiscal deficits?

    Read about the history of deficit spending in the United States, dating back to 1789, and learn about then-Treasury of the ... Read Answer >>
  6. How does fiscal policy impact the budget deficit?

    Find out how the different uses of fiscal policy impact a government's budget deficit, and the difference between contractionary ... Read Answer >>
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center