How Do You Tally the Benefits of a Tax Cut?

Even before President Bush unveils his fiscal agenda, policymakers are engaged in a backroom brawl over how to quantify the cost of upcoming tax cuts. The debate has been kicked off by supply siders, who want congressional forecasters to adopt a controversial new method for measuring the impact of tax cuts on the economy and the budget.

Why? Supply siders claim the technique, "dynamic scoring," calculates the effect of lower taxes on the economy more accurately than traditional forecasting. That's because dynamic scoring takes into account the growth brought about by declining taxes, which, they say, leads to more tax revenues and a lower deficit.

Suppose, for instance, Congress wanted to cut capital-gains rates. Dynamic scoring would figure whether such a cut would prompt investors to sell stock--and measure how much. It would then calculate how such sales would influence overall market values, and how a change in stock prices would affect the economy. Finally, dynamic scoring would figure how those broad changes raised or lowered overall tax revenues and, thus, the budget deficit.

Today, Congress does calculate the impact of capital-gains cuts on behavior. But it does not take the additional steps of sorting out the consequences for the economy. Critics say the reason is simple: The tools to do such calculations do not exist. Moreover, because dynamic scoring relies on arbitrary assumptions, they believe it can be manipulated, for political reasons, to show a lower deficit.

By Howard Gleckman in Washington

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