President Trump’s 2018 budget proposal details many federal programs he’d like to cut.
But his budget figures don’t jive with his policies because of something called “dynamic scoring.”
For example, Mr. Trump’s treasury secretary, Steven Mnuchin, wants to reduce the US business tax rate from 35% to 15%, but the White House’s budget projects tax receipts to increase every year from 2017 to 2027.
If businesses across the country are going to be paying less in taxes, how can the federal government collect more in taxes each year?
This discrepancy in budget projection figures is due to dynamic scoring, an accounting method that surprisingly has no standard methodology. Dynamic scoring is the practice of projecting the financial effects that a policy will have on the budget while taking into account different factors such as business and consumer behaviour.
It can be used for relatively simple calculations, such as how raising the sales tax on a particular item will affect its sales. But it gets more complex when trying to project the cost of, say, cutting federal taxes.
On its face, cutting federal taxes leaves the government with less money in its pockets. But it’s possible that if US businesses keep that money thanks to a lower tax burden, more Americans may end up with jobs. And if more Americans have jobs, the government’s tax base grows, potentially making up for the lost revenue from the tax cut.
Dynamic scoring is the practice of projecting out those events and factoring them into budget analysis, which is also known as budget scoring.
Standards? What standards?
The Congressional Budget Office began using dynamic scoring in 2015, but some people think establishing a standard methodology is crucial for dynamic scoring to work.
“If ‘dynamic scoring’ means that Congress can use any macroeconomic model it wants, then we are thrown back 100 or 150 years in terms of the rigour of our thinking,” writes Simon Johnson in a post for the Tax Policy Center.
Johnson formerly served on the CBO’s panel of economic analysis but was not involved in budget scoring.
Having no standard methodology for this type of budget scoring also means that think tanks and other partisan groups can tinker with their projections until they are left with an outcome they want.
“There are too many models with a very wide variety of assumptions and implications,” Johnson says. “It is not exactly true that you can find a model that will support any claims, but this is sometimes uncomfortably close to the truth.”
For this reason, dynamic scoring has become another issue dividing Washington politicians along party lines. Congressional Republicans have voiced their approval for the practice, while Democrats generally oppose it.
In his days as the House Budget Committee chairman, Paul Ryan was a proponent of dynamic scoring. “What we want to do is change our measurement,” said Ryan. “People say it’s dynamic scoring. I really call it reality-based scoring.”
Many Democrats stand firmly against the practice, citing the possibilities for inaccuracy.
One major critic is Vermont Sen. Bernie Sanders. In 2015, he made clear his distaste for this type of budget scoring.
“The basic problem with what the right-wing economists call ‘dynamic scoring’ is that it requires the CBO to count hypothetical growth as additional revenue,” Sanders said. “That means counting the chickens before they hatch.”
Before dynamic scoring was invented, the standard was static scoring, which omits macroeconomic projections by assuming the GDP will remain unchanged by budgetary policy.
Though that assumption is undeniably flawed, static scoring offers greater simplicity and transparency, because if everyone is using the same methodology, no one can mess with the number to get a desired outcome.
Business Insider Emails & Alerts
Site highlights each day to your inbox.