What Is Dynamic Scoring?
Dynamic scoring is a method of estimating the budgetary impact of a change in government policy, which accounts for the secondary economic effects of the policy on all sources of government revenue and expenses in addition to the direct effects of a policy on spending and revenue. In dynamic scoring, these secondary effects are estimated using some sort of macroeconomic or econometric model.
Because these models can take many forms and include many different kinds of assumptions about the structure of the economy and people’s economic behavior, the results of dynamic scoring can be highly dependent on the specific model and assumptions used.
Dynamic scoring can be contrasted to static scoring, which estimates only the direct impact that a policy change will have on government revenues and expenditures without otherwise assuming any change in the economy as a result of the policy.
- Dynamic scoring is a method of estimating the total fiscal impact of a policy change, including the secondary economic effects.
- When government policies change, people tend to adjust their behavior as a result of the policy in ways that can impact the tax revenue or government expenditures in other ways.
- Dynamic scoring can provide a more complete picture of the impact of a policy change than static scoring.
- Dynamic scoring is highly dependent on the type of model and assumptions used to estimate these secondary economic effects, so can not always be accurate.
- Dynamic scoring typically helps the case for pro-growth policies because it takes into consideration the larger, positive impact of such policies on the economy.
Understanding Dynamic Scoring
When any government policy changes, people will tend to change their behavior in response. To a large extent, this is usually the point of the policy change in the first place, but we also know that often changes in government policy can come with unintended consequences and that the changes in people’s behavior may involve more than the immediate, direct response to the policy change.
Because fiscal concerns are such a priority for policymakers, the direct and indirect effects of a policy change on government revenues and expenditures are typically of particular concern. To this end, when a new policy is proposed, estimating and projecting the fiscal impact of the new policy on the government’s budget is normally a major component of the debate around the policy change. This process of estimating the fiscal impact of policy change is known as “scoring.”
How Dynamic Scoring Is Done
Scoring is traditionally done by a method now referred to as static scoring. In static scoring, the direct fiscal impact of a policy is measured or estimated using a simple model.
For spending changes this is usually quite straightforward; the fiscal impact is the amount appropriated for the expenditure or an estimate based on simple assumptions around participation or demand on a particular program. For tax policy changes, revenues need to be estimated, but still, the assumptions used to estimate the revenue generated are usually simple and noncontroversial.
For example, if a proposal is put forth to place a $0.05 per gallon retail tax on milk and 50,000 gallons of milk are bought and sold annually in the jurisdiction, then using static scoring the tax could be estimated to raise $0.05 x 50,000 = $2,500 per year; however, because the tax also impacts the total price that consumers would now be paying for milk, and the law of demand tells us that people will tend to buy less at the higher price, the actual revenue will almost certainly be less than $2,500. This is where dynamic scoring comes in.
With dynamic scoring, economists can use economic models to predict the amount of milk demanded on the market will fall with the new tax, and using econometric models to estimate the shape of the demand curve for milk, they can put a number on how much they estimate this effect will be.
The government primarily uses static scoring but with some proposed legislation, dynamic scoring is required to also be used.
Note that in theory, this technique should arrive at a more accurate estimate of the actual fiscal impact of the policy change; however, because dynamic scoring depends on introducing some economic theory and econometric modeling into the mix, the improved accuracy of the estimate produced will only be as good as the theory, modeling assumptions, and reliability of the model estimates. While more accurate in theory, dynamic scoring also introduces a lot of new potential for error in practice.
Advantages and Disadvantages of Dynamic Scoring
Dynamic scoring has two primary advantages: it improves the accuracy of budget scores, and it removes the bias against pro-growth policies.
When policies cause the economy to grow, this impacts the budget because the government is bringing in more revenue while less money needs to be spent on certain programs, such as unemployment. On the other hand, if the economy is slowing down, the government makes less revenue while increasing spending on government programs, such as unemployment.
Dynamic scoring assesses the impact of government policies in all areas, as noted above, which allows for more accurate budgeting.
Current scoring ignores macroeconomic effects and, therefore, causes the budgetary costs of growth policies to appear higher than they actually are and, conversely, lower than they are for anti-growth policies.
Dynamic scoring would take into consideration the true benefits and costs of growth or anti-growth policies, which could lead to pro-growth policies being approved.
Some of the primary disadvantages of dynamic scoring are that it relies on theory-based models that are not completely accurate, the fact that economists don't have a true way to measure the impact of policies, macroeconomic models used in dynamic scoring tend to ignore certain aspects of public investment, as well as excluding the impact of income inequality and other policies.
Improves the accuracy of budget scores
Removes the bias against pro-growth policies
Relies on inaccurate theory-based models
Economists can't fully measure the impact of policies
Macroeconomic models ignore aspects of public investment
Macroeconomic models don't take into consideration income inequality
Dynamic Scoring vs. Static Scoring
Static scoring assumes that tax changes don't have any effect on the decisions of taxpayers. As a result, static scoring assumes that these tax changes have no impact on macroeconomic indicators, such as gross domestic product (GDP), jobs, and investment.
Dynamic scoring, on the other hand, seeks to analyze the impact that policy changes have on the behavior of taxpayers, and how those behaviors impact macroeconomic factors. Static scoring is limited in scope and one-dimensional. Dynamic scoring is broader, encompassing a variety of areas that can be influenced by changes in policies.
The Tax Cuts and Jobs Act, passed in 2017, was analyzed by the Joint Committee of Taxation (JCT) before being passed, and under static scoring, was expected to increase the budget by $1.5 trillion dollars. When dynamic scoring was used, taking into consideration macroeconomic factors, the TCJA was shown to increase the deficit by a smaller amount: $1.1 trillion.
The reason dynamic scoring showed a smaller increase in the deficit is because it showed that tax cuts would actually increase economic activity. It included the impact the act would have on disposable income, which would be increased, causing people to spend more, boosting the economy. The lower tax rates would also increase savings and investments.
What Is a Dynamic Tax Analysis?
A dynamic tax analysis seeks to assess the impact that tax policies would have on the behavior of taxpayers. It looks to understand the secondary effects of a policy rather than just the direct effects. It does so by analyzing how the policies change behavior and how those behaviors impact macroeconomic factors.
What Is a CBO Score?
The Congressional Budget Office (CBO) provides a score, which is actually an estimate on the cost of certain proposed legislation. The score seeks to determine whether legislation will increase or decrease the deficit and what other benefits or costs may arise from passing or not passing the legislation.
What Is Budget Scoring?
Budget scoring is the impact that policies will have on the government's budget, such as government spending, revenues, and deficits. Scoring can be done in two ways: static (conventional) scoring or dynamic scoring.