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The Role of Dynamic Scoring in the Federal Budget Process: Closing the Gap between Theory and Practice

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  • Rosanne Altshuler
  • Nicholas Bull
  • John Diamond
  • Tim Dowd
  • Pamela Moomau

Abstract

This paper discusses several issues that arise in the process of analyzing the macroeconomic effects of tax policy proposals in a way that is of practical use to legislators. In the current federal legislative process, much of the economic analysis of tax legislation boils down to a single set of numbers: an estimate of the effects of the proposal on projected federal revenues over the ten-year period following the current fiscal year. We discuss some of the practical aspects of developing a methodology for “dynamic scoring,” or accounting for potential macroeconomic effects in the estimate of the revenue effects of a specific tax proposal. While there are many areas of theoretical debate and uncertainty in modeling the macroeconomic effects of tax policy, we discuss three often-overlooked practical issues in incorporating those effects in a revenue estimate: (1) translation of the tax proposal into inputs to a macroeconomic model that capture all the features of the proposal that are likely to have an impact on the economy; (2) adjustment of the tax and revenue related equations in the macroeconomic model to account for the difference between the actual present-law Internal Revenue Code and the specifics of the tax proposal being analyzed; and (3) reconciliation of differences in definitions of income between National Income and Product Account (“NIPA”) data that macroeconomic models are typically calibrated to replicate, and the cash-basis income flows on which the present-law tax code is based. We show how the effects of proposed tax changes on GDP and revenues can vary depending on the methodologies chosen to address each of these issues.
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Suggested Citation

  • Rosanne Altshuler & Nicholas Bull & John Diamond & Tim Dowd & Pamela Moomau, 2005. "The Role of Dynamic Scoring in the Federal Budget Process: Closing the Gap between Theory and Practice," American Economic Review, American Economic Association, vol. 95(2), pages 432-436, May.
    • Handle: RePEc:aea:aecrev:v:95:y:2005:i:2:p:432-436
    Note: DOI: 10.1257/000282805774669754
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    References listed on IDEAS

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    1. Diamond, John W. & Moomau, Pamela H., 2003. "Issues in Analyzing the Macroeconomic Effects of Tax Policy," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(3), pages 447-462, September.
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    Cited by:

    1. Salvador Barrios & Mathias Dolls & Anamaria Maftei & Andreas Peichl & Sara Riscado & Janos Varga & Christian Wittneben, 2019. "Dynamic Scoring Of Tax Reforms In The European Union," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 38(1), pages 239-262, January.
    2. Thor O. Thoresen & Jørgen Aasness & Zhiyang Jia, 2008. "More realistic estimates of revenue changes from tax cuts," Discussion Papers 545, Statistics Norway, Research Department.
    3. Dolls, Mathias & Wittneben, Christian, 2017. "Dynamic Scoring of Tax Reforms in the EU," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168261, Verein für Socialpolitik / German Economic Association.
    4. Zodrow, George R. & Diamond, John W., 2013. "Dynamic Overlapping Generations Computable General Equilibrium Models and the Analysis of Tax Policy: The Diamond–Zodrow Model," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 743-813, Elsevier.
    5. Rachel Moore & Brandon Pecoraro, 2020. "Dynamic Scoring: An Assessment of Fiscal Closing Assumptions," Public Finance Review, , vol. 48(3), pages 340-353, May.
    6. Rachel Moore & Brandon Pecoraro, 2021. "A Tale of Two Bases: Progressive Taxation of Capital and Labor Income," Public Finance Review, , vol. 49(3), pages 335-391, May.

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    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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