The Role of Dynamic Scoring in the Federal Budget Process: Closing the Gap between Theory and Practice

This paper discusses several issues that arise in the process of analyzing the macroeconomic effects of tax policy proposals in a way that is of practical use to legislators. In the current federal legislative process, much of the economic analysis of tax legislation boils down to a single set of numbers: an estimate of the effects of the proposal on projected federal revenues over the ten-year period following the current fiscal year. The authors discuss some of the practical aspects of developing a methodology for "dynamic scoring" or accounting for potential macroeconomic effects in the estimate of the revenue costs of a specific tax proposal. The authors discuss often-overlooked practical issues in incorporating those effects in a revenue estimate. The authors also show how the effects of proposed tax changes on GDP and revenues can vary depending on the methodologies chosen to address each of these issues.