WebMemo- The Heritage Foundation's Web Memo is an online exclusive analysis that supplies Heritage.org visitors with the information they need to follow fast-breaking policy developments.
February 9, 2006
By William W. Beach
(click here for PDF
All of the press commentary on President
George W. Bush's 2007 budget proposal has paid virtually no
attention to one of its most significant initiatives. And it is no
wonder: how could a move to improve the way the government analyzes
tax policy compete with cutting outdated programs, making the
United States more competitive, and winning the global war on
This little-noted initiative, however,
may be historically important. Buried deep in the President's
proposals for the Department of the Treasury is a plan to create a
Dynamic Analysis Division within the Treasury's Office of Tax
Analysis. This division would advise the President and other key
policymakers on how proposed changes to U.S. tax policy would
affect economic activity. Inside the Beltway, this type of analysis
is called "dynamic scoring." Outside the Beltway, this is called
So why is this news? Hasn't the
government been studying the effects of tax policy on the economy
all along? Aren't Washington policymakers routinely advised about
how tax changes will affect jobs and output and how those, in turn,
will affect government revenues?
Surprisingly, the answer is often no.
Until very recently, no official Washington agency produced
estimates of the economic and tax-revenue effects of proposed tax
policies. Congress's official tax policy scorekeeper, the staff of
the Joint Committee on Taxation, began building this capability a
few years ago and since has produced a few dynamic scoring
documents. The Congressional Budget Office also recently began
publishing its estimates of how the President's and Congress's
budget plans (which include tax changes) would affect economic
activity. However, all of these documents together still fit into a
slim file folder. So far, the Treasury Department has done almost
nothing to contribute to that literature.
Unless policymakers can see that some
tax policy changes support more vigorous economic activity while
others do not, they may (and indeed have) enact tax laws that are,
at best, economically meaningless or, at worst, downright harmful.
Dynamic scoring can help to sort the good from the bad.
Take, for example, the child tax credit.
Advocates of the credit (now worth $1,000 per child) argued that it
would put money into the hands of consumers, who would spend those
funds, thus fueling economic activity. Had those policymakers been
advised about the likely economic effects of this tax change, they
would have learned that the credit would do nothing to lower the
costs of working or investing-two of the biggest drivers of
economic activity-and that cash windfalls almost always are saved,
especially by taxpayers with children. There is nothing wrong with
saving for a child's education, but it will not lead to the bump in
current consumption that advocates of the child tax credit
While the child tax credit has not done
very much, if anything, for today's economy (as dynamic scoring
would have projected), the same cannot be said for raising taxes to
reduce the federal budget deficit. Advocates of this approach
appear to argue that tax increases will not affect economic
activity but that growing budget deficits do. Standard models of
the economy, however, show that income tax increases are harmful to
growth in employment, investment, output, savings, and even
government revenues. They also show that deficits by themselves
have little effect on interest rates. In short, raise taxes to
reduce deficits, and the result will be higher unemployment, a
slower pace of economic growth, and revenues that are not rising as
quickly as static scoring predicted.
Dynamic scoring might not prevent bad
tax policy from becoming law, but it would help. Furthermore,
reporting the economic consequences of tax proposals will be
enormously helpful in redesigning the tax system. The President has
called for fundamental tax reform, and he and Congress will find
fundamental reform a much easier exercise if routine and
sophisticated dynamic scoring is in place when that task is
So, congratulations to the Bush
Administration and particularly to the Department of the Treasury!
This little-noted proposal may be the most important change in
many, many years to the way tax policy is formulated.
W. Beach is Director of the Center for Data Analysis at The
At last, real economics will guide tax policy.
William W. Beach
Director, Center for Data Analysis and Lazof Family Fellow
Read More >>
Heritage's daily Morning Bell e-mail keeps you updated on the ongoing policy battles in Washington and around the country.
The subscription is free and delivers you the latest conservative policy perspectives on the news each weekday--straight from Heritage experts.
The Morning Bell is your daily wake-up call offering a fresh, conservative analysis of the news.
More than 200,000 Americans rely on Heritage's Morning Bell to stay up to date on the policy battles that affect them.
Rush Limbaugh says "The Heritage Foundation's Morning Bell is just terrific!"
Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."
Sign up to start your free subscription today!
The Heritage Foundation is the nation’s most broadly supported public policy research institute, with hundreds of thousands of individual, foundation and corporate donors. Heritage, founded in February 1973, has a staff of 275 and an annual expense budget of $82.4 million.
Our mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. Read More
© 2013, The Heritage Foundation Conservative policy research since 1973