How Dynamic Scoring May Impact Tax Return



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Dynamic-Scoring-Tax-Reform
With the Republican controlled Congress, there is increased interest in utilizing dynamic scoring concepts when implementing longer term policies pursuant to major tax reform.  There is a uniform consensus that the current tax system is overly complex and subject to the vagaries of special interest groups rather than serving the countries major policy goals.  Dynamic scoring is a tool that can be used to help policy makers and legislators determine the overall economic impact of a particular tax provision.  The results can be used to rate or compare the overall economic impact of a specific tax provision as compared to an alternative tax provision.  Tax provisions with very high dynamic score ratings actually cost the country less (or even be tax revenue positive) and may enable the enactment of more important tax incentives. Although there are important national policy goals that are unrelated to tax, tax considerations are economic decision making criteria so tax provisions in particular should be subject to dynamic scoring.

Technical Definition of Dynamic Scoring

Dynamic scoring predicts the impact of fiscal policy changes by forecasting the effects of economic agents' reactions to incentives created by policy. It is an adaptation of static scoring, the traditional method for analyzing policy changes.

The method gives way to a more accurate prediction of a policy's impact on a country's fiscal balance and economic output, when feasible. The potential for heightened accuracy occurs from recognizing that households and firms will change their behavior to continue maximizing welfare (households) or profits (firms) under the new policy. Dynamic scoring is more accurate than static scoring when the econometric model correctly captures how households and firms will react to a policy change.

Leading Policy Makers & Dynamic Scoring

Rep. Paul Ryan (R-Wis.) stated that he would push to make sure that the two congressional budget scorekeepers use the accounting method of dynamic scoring when evaluating GOP tax reform legislation. Sen. Orrin Hatch (R-Utah), who will chair the Senate finance committee starting in January, responded that he was open to implementing the change. Ryan and Hatch can implement dynamic scoring by directing the two budget scorekeepers to accept this budgeting method. Congress could require the Congressional Budget Office and Joint Committee on Taxation to use assumptions about how tax cuts affect the economy. Examples of such assumptions include how they can see how tax cuts influence people's motivation to work, the moves of the Federal Reserve, and household and business decisions on savings and investment. Budget analysts then can plug said assumptions into several models to estimate economic growth.

Dynamic Scoring Constraints

One of the main criticisms of dynamic scoring is that the determination and calculation of the economic impacts may be very difficult and also subjective.   Although this is a well founded criticism today's predictive analytics and software are making this process more quantifiable and understandable.

Conclusion

Prospective debate on integrating dynamic scoring with tax reform should prove interesting. Before reacting with traditional criticism opponents may want to evaluate the improving science of predictive analysis.

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Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Jennifer Reardon is a Project Coordinator with R&D Tax Savers.