Posted on 03/24/2006 8:06:11 PM PST by JR Reyling
Background
Why do I care about Dynamic Scoring? If you pay taxes and care about long term economic growth, you should become familiar with the concept of Dynamic Scoring. Today, Congress projects funding increases from a tax rate change without regard to impacts on incentives and economic behavior. The costs associated with lost incentives can be 17% of lifetime consumption as will be seen in the social security case study. The process of static scoring opaquely measures the impact of tax rate changes. While Static versus Dynamic Scoring may sound arcane at first, they boil down to accurately and transparently measuring tax collections. Just like the Annual Percentage Rate (APR) brings transparency to the true costs of borrowing money, Dynamic Scoring brings transparency to the true costs of government extracting resources from a market economy to fund its functions, operations and transfer payments.
If GDP does not grow or even recedes, resources allocated to public needs will be ultimately constrained. This implies a shift in how a federal budget should be constructed from spending driven to growth driven. One could think of this shift in budget creation in a manner that a typical household constructs its budget. First a level of income is established. Next, allowable long-term (mortgage, retirement) and short-term (entertainment, food etc) expenses are deducted from this income constraint. The remaining funds will be invested, increasing future consumption. Similarly, the federal government should set its income constraint each budget cycle based on a reasonable level of resources extracted from the economy as defined below.
(Excerpt) Read more at dynamictaxscoring.com ...
1) Currently, projected tax collections are not measured correctly. Tax code structure and rate changes have been incorrectly modeled and their affects on individual incentives to produce and create GDP growth are obliquely understood.
2) The 1974 and 1996 tax data illustrates and validates the Prescott's theoretical framework in a stark, visual picture for the reader without requiring one to read Prescott's powerful but heavy work.
3) A new and innovative graphical creation of the Laffer Curve linked to accelerated diminishing labor supply curve, proving the Laffer Curve with real tax data.
4) Innovative 'Tax Gap' graph, visually and dramatically showing the yawning gap between tax collections from static and dynamic scores.
5) This paper calls for greater transparency by providing annual tax impact statements (similar to social security) for all proposed tax code changes expressed in hard dollars. Truth in tax payments in hard dollars can be thought of in a similar way to APR as a measurement of lender costs.
6) An effective pay increase of 17% for taxpayers for correctly scoring the feedback effects in lowering marginal tax rates to fully fund social security.
ping
ping
bttt
Obviously the problem is deciding how dynamic a particular tax cut is going to be. It would be hard to get several people to agree on how much tax revenue a particular tax increase or cut will bring. Even after the fact, Left and Right cannot agree. Left will attribute the revenue increases to other factors, while Right will attribute all of the revenue increase to the tax cut.
Why not instead base next year's budget on this year's revenue?
Actually, your paper is pretty good -- now the hard part is getting anyone in power to accept it. A lot of man hours are wasted in trying to predict how much revenue is going to come in -- that's why I thought that getting people to accept the previous year's revenues would be an improvement.
Thank you for your response. This paper graphically shows Edward Prescott's(Nobel Prize 2004, Economics) findings on Dynamic Scoring. The point is that the 'cost' of earned income, dividends or capital gains is the marginal tax rate.
And the data clearly show that as we increase the cost of working, we get less working!
This seemingly simplistic finding has huge implications for the growth of the economy and individual well being.
Please read the paper, here:
dynamictaxscoring.com
I agree with you! When you read the paper, you will see that the Federal Budget should be based on a 'funding constriant' based on taxes taken from the economy on a reasonable basis.
This is often expressed as:
This year's budget = Last year's budget + Inflation + Population Growth
regards,
I really got whacked with a captital gains tax last year that still has me seething. Do you address this anywhere in your paper even in a general sense?
Leni
Excellent and good luck!
BUMP
It is so good to see how a derivation of the Laffer curve from data is possible. The absence of such has been a gigantic hole in the theory. You also reject the idea that maximum tax collections in any given year is "optimal".
Referring to the pdf of your paper, I have a couple of questions: On pdf page 11, you say, "Diminishing revenues kicks in at 42% tax rate where the slope of taxes collected is one"
I don't understand what this means. I'm inclined to think there is a misprint since revenue doesn't start to decline until 55%. I don't understand what the significance of the slope of the Laffer curve being 1 is.
On pdf pages 9 & 10 you say that the data and curves fit very well. When I look at the charts of the data, I'm not sure how impressed to be. Have you some statistical measure of how good the fit is? Also, the data points are all near the middle of the curves. In other words there is no support for drawing the ends of the curves where they are drawn. -(This refers to the highest and lowest tax rates.) I haven't tried to read Prescott's paper yet which may have answers to this.
Isn't it true that there will be a different Laffer curve for each time frame? -For example if you want to know what tax rate maximizes tax revenue this year, you say 55%. But if the question is how to get the maximum revenue over the next 10 years or 50 years, the maximizing tax rate would be much lower, I suppose. It would be extremely interesting to learn how to calculate such numbers and to comtemplate the results!
Thank you for the excellent paper!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.