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Dynamic Scoring: An Assessment of Fiscal Closing Assumptions

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  • Rachel, Moore
  • Pecoraro, Brandon

Abstract

Analysis of fiscal policy changes using general equilibrium models with forward-looking agents typically requires the modeler to assume a counterfactual adjustment to some fiscal instrument in order to achieve the debt sustainability implied by the government's intertemporal budget constraint. Since the fiscal instrument chosen to close the model can induce economic behavior unrelated to the policy change in models where Ricardian Equivalence does not hold, noise may be introduced into the analysis. In this paper we use such an overlapping generations framework to examine the impact of alternative fiscal closing assumptions on projected changes to economic aggregates over the ten-year `budget window' following a change in tax policy, assessing the extent to which the noise associated with a particular fiscal instrument can be mitigated. We find that while quantitative differences in projected macroeconomic activity can be observed across alternative fiscal instruments, these differences tend to shrink as the date that fiscal instruments begin to adjust is delayed into the future. Since the particular fiscal instrument chosen to achieve debt sustainability can then become relatively unimportant, the reliability of policy analysis obtained using this class of models may be improved.

Suggested Citation

  • Rachel, Moore & Pecoraro, Brandon, 2018. "Dynamic Scoring: An Assessment of Fiscal Closing Assumptions," MPRA Paper 89325, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:89325
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    References listed on IDEAS

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    1. 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.
    2. Richard W. Evans & Laurence J. Kotlikoff & Kerk L. Phillips, 2012. "Game Over: Simulating Unsustainable Fiscal Policy," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 177-202, National Bureau of Economic Research, Inc.
    3. 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.
    4. 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.
    5. Congressional Budget Office, 2019. "Marginal Federal Tax Rates on Labor Income: 1962 to 2028," Reports 54911, Congressional Budget Office.
    6. Moore, Rachel & Pecoraro, Brandon, 2020. "Macroeconomic implications of modeling the Internal Revenue Code in a heterogeneous-agent framework," Economic Modelling, Elsevier, vol. 87(C), pages 72-91.
    7. Alan J. Auerbach, 2005. "Dynamic Scoring: An Introduction to the Issues," American Economic Review, American Economic Association, vol. 95(2), pages 421-425, May.
    8. Alan J. Auerbach & Itai Grinberg, 2017. "Macroeconomic Modeling of Tax Policy: A Comparison of Current Methodologies," National Tax Journal, National Tax Association;National Tax Journal, vol. 70(4), pages 819-836, December.
    9. Jason DeBacker & Richard W. Evans & Kerk L. Phillips, 2019. "Integrating Microsimulation Models of Tax Policy into a DGE Macroeconomic Model," Public Finance Review, , vol. 47(2), pages 207-275, March.
    10. Jaeger Nelson & Kerk Phillips, 2019. "Macroeconomic Effects of Reducing OASI Benefits: A Comparison of Seven Overlapping-Generations Models," National Tax Journal, National Tax Association;National Tax Journal, vol. 72(4), pages 671-692, December.
    11. Douglas W. Elmendorf, 2015. "“Dynamic Scoring”: Why and How to Include Macroeconomic Effects in Budget Estimates for Legislative Proposals," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(2 (Fall)), pages 91-149.
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    Cited by:

    1. Moore, Rachel & Pecoraro, Brandon, 2019. "Modeling the Internal Revenue Code in a heterogeneous-agent framework: An application to TCJA," MPRA Paper 93110, University Library of Munich, Germany.
    2. Moore, Rachel & Pecoraro, Brandon, 2021. "Quantitative Analysis of a Wealth Tax in the United States: Exclusions, Evasion, and Expenditures," MPRA Paper 109120, University Library of Munich, Germany.
    3. Moore, Rachel & Pecoraro, Brandon, 2023. "Quantitative analysis of a wealth tax for the United States: Exclusions and expenditures," Journal of Macroeconomics, Elsevier, vol. 78(C).
    4. Moore, Rachel & Pecoraro, Brandon, 2020. "Macroeconomic implications of modeling the Internal Revenue Code in a heterogeneous-agent framework," Economic Modelling, Elsevier, vol. 87(C), pages 72-91.
    5. 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

    Keywords

    dynamic scoring; fiscal closing assumptions; sustainable fiscal policy;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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