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1 1 (January 9, 2018)

handle is hein.crs/govcfvr0001 and id is 1 raw text is: FF.ri E.$~ & p\w -- , gnom go mppm qq\ , q I aS 11LIANJILiN, Updated January 9, 2018 Key Issues in Tax Reform: Dynamic Scoring Dynamic scoring includes, in projections of revenue effects, indirect changes in tax collections due to the overall growth effects on the economy. If the economy becomes larger due to the tax revision, tax revenues are larger because of the larger base. urnk m .ry \aK tzrrernt Rr actk'es The estimated revenue effects (i.e., the score) of tax revisions are prepared by the Joint Committee on Taxation (JCT) and provided to the Congressional Budget Office (CBO); CBO provides the cost estimates for legislation. These estimates assume no changes in the overall size of the economy, although they do allow for other behavioral effects (such as a change in capital gains realizations). When legislation is considered, by tradition and norm, these JCT and CBO estimates are the basis for determining compliance with the budget rules. Beginning in 2003, House rules provided for advisory estimates of macroeconomic effects, and the JCT usually provided a range of estimates based on different models and assumptions. In most analysis of major legislative changes, estimates of macroeconomic effects of tax cuts or other changes varied considerably, although none were large enough to offset a revenue loss estimated by conventional methods. In the 114th Congress, the House adopted rules that required a dynamic score for a measure that affected the deficit by 0.25% of GDP or at the request of the chairman of the Budget Committee or chair or vice-chair of the JCT (i.e., the chairman of the Ways and Means Committee). This provision was incorporated in the budget resolution, which extended to the Senate, but only on an advisory basis. Currently, the House has retained this rule, but it is not in effect for the Senate. In any case, no law requires the use of the JCT-CBO score; budget scores are decided by the Budget Committees, and by tradition, by the chairmen. The many macroeconomic analyses by the JCT over the years as well as macroeconomic analyses of the President's budget by the CBO have shown a broad range of projected effects and illustrated the uncertainties about these economic projections. The projected effects of a tax measure on economic growth depend on the type of effect considered and the assumptions surrounding the magnitude of the effect. Three types of effects can be considered. Short-run demand-side (often termed Keynesian) effects result from employing additional resources in an underemployed economy. They tend to increase output for tax cuts and decrease it for tax increases, although the magnitude of the response also depends on the type of tax change and whether it is more likely to affect spending. The effect depends on how close the economy is to full employment, how open the economy is (fiscal stimulus is less powerful in an open economy), the fundamental behavioral effects, and the extent to which the Federal Reserve may take actions to offset the effect. Because the economy is currently at full employment, a fiscal stimulus is unlikely to produce significant output effects. Demand-side effects are transitory and should fade over time. During the first hearings in 1995 on dynamic scoring (Joint Hearing Before the House of Representatives Committee on the Budget and the Senate Committee on the Budget, 104th Congress, Review of Congressional Budget Cost Estimating January 10, 1995), many economists counseled against including these transitory effects in dynamic scoring. Supply-side effects capture the increases or decreases in labor and capital that increase or decrease output. Average reductions in taxes reduce the supply of labor and capital, but marginal reductions (decreases on the last increment of supply) increase the supply as the consumption that people can achieve by working becomes cheaper relative to leisure. Similarly, the effect of an increase in the after-tax rate of return on saving is theoretically ambiguous. Labor-supply effects can happen relatively quickly, but capital income effects tend to accumulate more slowly and then settle down into a steady state long-run effect. Both the speed and the size of supply-side effects depend on behavioral responses. Empirical evidence suggests labor supply and savings responses are relatively small, and models that apply the elasticities from the literature to a growth model tend to obtain small results. Some models (life-cycle and infinite-horizon) allow individuals to choose consumption and leisure over a lifetime taking into account future wages and rates of return. In these models, embedded elasticities are sometimes larger than those suggested by the literature (see CRS Report R43381, Dynamic Scoring for Tax Legislation: A Review of Models, by Jane G. Gravelle). In the past, the JCT has used both a basic macroeconomic model that can capture all three effects and a dynamic life- cycle mode that captures only supply-side effects. The elasticities used in these two models are similar. Supply-side effects also depend on whether the modeling takes place in a closed or open economy (with trade and capital flows). If the economy is open, the effect depends on how substitutable capital is internationally. K~:>

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