What Is Dynamic Scoring?
Dynamic scoring is a forecasting technique that makes predictions about the behavior of people and businesses in response to changes in fiscal policy, usually tax rates. The Congressional Budget Office (CBO) and the Joint Committee on Taxation are tasked with forecasting the budgetary impact of legislation; incomes, employment, and various other measures of economic activity—including gross domestic product (GDP)—can be sensitive to changes in policy. The "scores" that are given to prospective budgets inform the basis for policy debates and deliberation.
Dynamic scoring is one method for predicting the budgetary impact of proposed policy changes; it is used to assess government revenues, expenditures, and budget deficits. Dynamic scoring is one of two models that accounts for how fiscal policy changes indirectly affect macroeconomic measures in the long term.
The second model, called static scoring, measures the immediate and direct change to spending, revenue, and the deficit due as a result of new fiscal policies.
- Dynamic scoring is a forecasting technique that makes predictions about the behavior of people and businesses in response to changes in fiscal policy, usually tax rates.
- The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) are tasked with forecasting the budgetary impact of legislation.
- Incomes, employment, and various other measures of economic activity—including gross domestic product (GDP)—can be sensitive to changes in policy.
- In 2015, House Republicans passed a law that required the CBO and JCT to use dynamic scoring for major legislation. Prior to this, budget scores did not take into consideration the long-term impact on employment, gross domestic product, and other macroeconomic measures.
Understanding Dynamic Scoring
The method of dynamic scoring adheres to supply-side economics, which states that supply is the primary driving force behind an economy’s growth. When capital and labor are both supplied, demand is created. An increase in tax on a worker’s wage impacts the amount of labor that they provide. In general, this theory says that the worker will work less, save less, and invest less.
Alternatively, tax cuts mean more disposable income for the worker. According to this same theory, this worker would, in turn, work longer and harder, and save and invest more money, thereby stimulating economic 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. Prior to this, budget scores did not take into consideration the long-term impact on employment, gross domestic product, and other macroeconomic measures.
For example, the CBO evaluated then-President Barack Obama’s budget for the fiscal year 2013 by calculating where the deficit would be after its impact on GDP was factored in. The dynamic score showed that the GDP, due to the proposed budget, would 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.
Since 2015, the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) have included secondary, macroeconomic impacts in official scores as long as the proposed legislation has a sufficiently large budget impact (more than 25% of gross domestic product (GDP) in any year in the budget window).
While Republicans believe that tax cuts will contribute largely to the growth of the economy and use dynamic scoring to support their claims, opponents argue that dynamic scoring is a biased measure. They claim that dynamic scoring will only encourage tax cuts and increase the country’s deficit in the long run. In 2003, then-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 proposed plan to cut taxes for businesses and individuals—The Tax Cuts and Job Act (TCJA) of 2017—showed that the increase in the supply of labor and capital that will ensue will eventually be offset by the reduced investments from a higher budget deficit.
Example of Dynamic Scoring
For example, suppose that the income tax for a certain worker was cut from 30% to 25%. This worker earns $100,000 per annum. So, the federal revenue produced from this one worker is reduced to $25,000 from $30,000. Because the lower tax rate cost the government $5,000 in lost revenue, a static analysis would state that the tax cut will have no impact or change in how the worker behaves.
However, dynamic scoring assumes that the lower tax rate will lead to higher disposable income. Hypothetically, this would create 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 this worker—suppose $100,000, which is also taxed at 25%. Thus, the government receives an inflow of $25,000; this either fully or partially offsets the initial cost.
Other behavioral responses to changes in policy include a cigarette tax that reduces smoking or subsidies for health insurance that increases coverage.