The vice president holds forth on the elasticity of tax receipts with respect to the tax rate.
Vice President Cheney last week stated, according to Reuters:
“Nobody’s perfect, but when revenue projections are off by 180 degrees, it’s time to reexamine our assumptions and to consider using more dynamic analysis to measure the true impact of tax cuts on the American economy,” he said in a speech to the American Conservative Action 2006 Conference.
This view is, apparently, the motivation for the President’s proposal for a new unit in the Treasury Department to implement dynamic scoring. From the Washington Post:
Treasury officials said yesterday that the president’s proposed Division on Dynamic Analysis — with a handful of employees and a $513,000 budget — would go beyond the government’s old “static” methods of analyzing proposed changes in tax policy only in terms of their direct effects on certain affected taxpayers. Instead, “dynamic” analysis looks at how tax changes cause consumers and businesses to behave differently in ways that affect the overall economy’s growth.
Dynamic scoring makes intellectual sense. And in proper hands, and with proper deference to our uncertainty regarding the correct model and model parameters, it can be a useful approach. Indeed in the CBO’s analysis of the President’s proposals in 2003, the results of dynamic scoring were reported (although not incorporated in the official forecasts). As it turned out, half of the estimates from the “dynamic” models implied higher revenue losses than those from static models criticized by the Vice President.
Of course, if there is dynamic scoring of tax revenues, then for the sake of consistency, spending measures should be also scored. Even in real business cycle models with Ricardian equivalence, spending has effects (usually depressing economic welfare in RBC models).
So dynamic scoring, in the hands of a professional staff cognizant of the extent of model uncertainty, well insulated from political pressures, would be a good thing. However, WMDs, “last throes of the insurgency”, and the “Clear Skies” initiative, might give an impartial observer pause for thought.