Wednesday, January 17, 2018

2018 NYU Tax Policy Colloquium: Greg Leiserson on dynamic scoring, part 3

The central conclusion I reached in my prior two posts (here and here) was not that dynamic scoring - i.e., attempting to measure macroeconomic responses to proposed tax law changes and to incorporate them in revenue estimates - is inherently wrong (it's not), but rather that its prominence within the information package that Congress considers can lead to worsened short-termism and biased decision-making.

In the particular context of the 2017 act, suppose all that one changed was to base the centrally reported dynamic score numbers on gross national product (GNP), rather than gross domestic product (GDP). That would focus attention on the change in Americans' wealth, rather than on growth in the U.S. economy without regard to how much of the value being produced was owned by foreigners. That would be no less "dynamic" a score. What is more, neither GNP or GDP is inherently a better measure. - it depends entirely on what one wants to know. But in context this would likely have been less misleading, as consumers of the dynamic score, and the growth effects it suggested, probably implicitly assumed that it was all to the benefit of U.S. individuals.

This brings me back to the point that dynamic scoring was pushed by people on the right as a weaponized tool to favor their side in the tax cut debate. This point is not contradicted by dynamic scoring's having arguments in its favor, and indeed potentially improving information with regard to the particular narrow questions that it addresses.

This in turn calls less for rejecting it than recalibrating its use and seeking other tools to give greater prominence instead. These should both aim to supply useful information and to counter pervasive short-termism in the political budget process (possibly through different and complementary measures).

But a further question of interest is the following. Great, the right has had a shot at weaponizing the instruments used in budget debate in order to tilt the budgetary battlefield in its favor. Suppose people on the left wanted to do the same thing, only in their favor. Then what sorts of measures might they urge Congress, along with other information providers, to emphasize?

Here are three ideas that emerged from discussions that I had in relation to the colloquium. (I am putting it this way to minimize taking undue personal credit for ideas I got from other people, while also not directly reporting on the colloquium discussion, which was off the record.) None is anywhere close to fully formed or ready for primetime. They are rather possible directions for further thinking.

Idea #1 - dynamic scoring for growth-promoting public spending - For example, educational and infrastructure investment could have budget estimates that reduce the net cost by taking account of expected productivity gains and (perhaps separately) the tax revenue consequences of productivity gains.

Idea #2 - a measure that focuses on how tax changes affect inequality. This might be focused on high-end inequality (and separately on low-end inequality), and could take a number of different forms.

I don't think that a Gini-style composite measure is at all useful here. It both conflates two quite distinct issues - high-end and low-end inequality - and is too bloodless and technocratic-looking.

Instead, some sort of measure that looks at gains to the top 1% and the top 0.1%. This could be put in a number of different ways, but the point is to have something that combines good optics with being intellectually defensible to focus attention on plutocrats' gains from 2017-style tax changes.

Idea #3 - middle-class tax impact: Suppose one were to assume that unfunded tax cuts (or, say, income tax cuts) will be offset at some point by income tax increases, and that the latter will be proportionate to the different income percentiles' shares of overall federal tax (or income tax) liability after adoption of the tax cuts. Hence, anything that cut taxes disproportionately for people at the top, a la the 2017 tax act, would be shown as increasing middle class taxes once the tax cut was funded in the specified manner.

In each of these cases, accurate information would actually have been provided. (In case 3, this pertains to the particular set of questions being asked, whether or not it's true that the funding for the tax cut would definitely take that form.) So, no less than dynamic scoring, both may expand the information that policymakers have, only with a rather different focus on what questions are being asked.

Given that these ideas are still so preliminary and unformed, let me close here by making a more general point. This is not a matter of right or wrong - political players have every reason to try to tilt the process in their own favor - but I believe Republicans have, for decades, been much more active than Democrats in trying to shift the rules of various ongoing poltical games in their favor - whether we're talking about districting, campaign finance, voting restrictions, budget rules, or budgetary information. This has led to asymmetric warfare that one could blame, if one is so inclined, more on the Democrats than on the Republicans.

Democrats ought as a matter of self-interest to address this. In the budgetary realm in particular, one thing they ought to do, if they take control of Congress in 2018 or later, is change the budgetary and information reporting rules, and much else as well, in their favor. It's how the game is played these days. Dynamic scoring, other ways of doing dynamic scoring, and budgetary and information-providing rules more generally (in tax and elsewhere) are areas that they would be poring over carefully, if they were smart, in search of places to take advantage.

If the so-called wave emerges later this year, we will see if any of this actually happens.



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