Paul Ryan Calls for Tax Cut Mischief

Tax reform scaling back tax credits, deductions, and other preferences in order to cut tax rates
without increasing the deficit is harder than it looks. Just ask outgoing House Ways and Means
Chairman Dave Camp, R-Mich., whom I praised here this year for approaching the task seriously
but, as a result, drafting a plan that fell flat with his own party.
The reality of tax reform, as Camp discovered, is that any politically feasible plan to scale back tax
benefits doesnt generate enough money to significantly cut tax rates without increasing the deficit.
Thats because the most expensive tax benefits are enormously popular, such as the tax-free
treatment of employer-provided health care, the mortgage interest deduction and various tax
preferences for savings and investment. Rather than grapple with this reality, Camps heir apparent,
current House Budget Committee Chairman Paul Ryan, invoked the last refuge of supply-side tax
cutters in recent comments about how to proceed with tax reform.
Our rules in Congress require that we don't take into consideration behavioral changes or
economic effects as a result of tax reform, he told Politico. What we want to do is change our
measurement. He also told Tax Notes, People say its dynamic scoring; I really call it realitybased scoring. What a misnomer!
Ryan wants to change long-established methods for estimating the revenue effects of proposed tax
changes that the Congressional Budget Office and Joint Committee on Taxation use to score the
budgetary effects of such legislation. Ryan echoes a common complaint among tax cutters, but he
badly mischaracterizes existing revenue estimation methods while ignoring the fatal flaws in
requiring budget crunchers to use so-called dynamic scoring.
His assertion that current revenue estimates dont account for behavioral changes reflects a popular
misunderstanding, as CBO explains here: CBOs analysts try to judge whether proposed policies
would affect peoples behavior in ways that would generate budgetary savings or costs, and those
effects are routinely incorporated in the agencys cost estimates Similarly, in its estimates of the
budgetary impact of tax legislation, the staff of the Joint Committee on Taxation accounts for
behavioral responses to changes in the tax system for example, changes in the timing and
amount of capital gains realizations when the tax rate applicable to capital gains is modified.
Ryan is right, however, that CBO and JCT do not include in their official revenue and cost estimates
possible macroeconomic feedback effects on the budget due to changes in the overall level of
economic activity that might result from proposed legislation and there are good reasons
why. First, estimates of the macroeconomic effects of tax changes are highly uncertain. Second, the
most credible estimates usually show changes that are quite small. Finally, and quite importantly,
dynamic scoring would impair the credibility of the budget process because the resulting budget
estimates will inevitably be controversial and subject to political manipulation.
For major legislation like tax reform, CBO or JCT may well issue a companion economic analysis
that includes estimates of macroeconomic feedback effects. Unlike an official budget estimate,
however, these economic analyses typically report a range of estimated economic and budgetary
effects, often because the analysis includes results from disparate underlying models that provide
disparate results. That raises a key question: How would Congress incorporate dynamic scoring into

a budget estimate when theres not even an established method to determine macroeconomic
feedback effects?
Dynamic-scoring advocates will point to CBOs estimates of the budgetary effects of recent
immigration proposals, in which CBO departed from its standard practice and incorporated the
significant direct effects of the legislation on population, employment and taxable compensation
into the official cost estimates. But CBO incorporated only those direct effects into the budget
estimate. It treated the more uncertain macroeconomic effects akin to those that can occur under any
major legislation, including tax reform, as it usually does in a companion economic analysis.
Thats the right way to do it. Macroeconomic feedback effects are fine in a dynamic economic
analysis. Dynamic scoring of budget estimates, in contrast, is a gimmick that would only invite
more mischief.