The House of Representatives voted this week to establish rules for the 114th Congress. One rule change requires that the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) dynamically score legislation. The change is a much-needed reform to the federal budgeting process.
The current legislative scoring process completed by CBO and JCT is generally called static scoring. It currently incorporates some microeconomic behaviorial responses to projected changes in federal spending and taxes.
But static scoring misses a big piece of the puzzle. It assumes that the size of the economy is constant. It does not include an analysis of the economy-wide responses to policy changes. By constrast, dynamic scoring acknowledges the obvious fact that actions of Congress could affect gross domestic product (GDP).
Consider a hypothetical income tax increase from 35 to 40 percent. The tax increase may cause individuals to work fewer hours and businesses to reduce their capital investment. Those sorts of decisions will be made by millions of individuals and businesses in response to tax changes. In aggregate, these responses would affect GDP. Dynamic scoring includes these macroeconomic responses.
Read more at http://www.cato.org/blog/dynamic-scoring-congress
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