The Score on Tax Policy: Make It More `Dynamic'

BARELY noticed amid White House concessions on military spending and school prayer, the Clinton administration has picked an open fight with the incoming Republican majority.

Alice Rivlin, President Clinton's chief budget officer, has attacked as ``nonsense'' and ``dishonest'' a Republican proposal to use a budget process known as dynamic scoring. In determining how much revenue will be collected, dynamic scoring allows for taxpayer responses to changes in tax rates. The current ``static'' method assumes that taxpayer behavior and taxable earnings don't change when tax rates change. Ms. Rivlin has said the White House intends to block the dynamic scoring proposal.

The proposed change could have a vast impact on national economic policy. Rep. John Kasich (R) of Ohio, the next House Budget Committee chairman, says the dynamic model will promote pro-growth policies. Democrats respond that dynamic scoring could be abused by overly optimistic Republicans, resulting in more of the huge budget deficits of the 1980s.

Two facts are being overlooked: First, dynamic scoring is already an official part of the United States budget process. Second, it lies at the heart of the Clinton administration's recent campaign for the General Agreement on Tariffs and Trade (GATT), which cuts the tariffs levied on products imported by the US and 123 other countries. Technically, the treaty will cut the US government's tariff revenue. But the Clinton administration estimates that tariff cuts will stimulate imports, partially making up for some of the lost revenue.

Mr. Clinton's economic team, in other words, has incorporated ``dynamic'' assumptions about economic behavior into its GATT estimates, assuming that a tax change will affect economic growth sufficiently to make up for the lost revenue.

Dynamic scoring in GATT

The gap between what the administration claims and its actual practice is evident among some of Rivlin's high-level staffers: They agree that Clinton's GATT policy involves dynamic scoring, but backpedal from calling it that because they know official policy is to condemn the concept.

This quirk in GATT policy points out more than just an inconsistency in the administration's accounting methods. It is a powerful lesson in good policymaking: Dynamic assumptions about the economy are one of the best sets of tools we have for generating pro-growth policies.

Clinton supports both GATT and the North American Free Trade Agreement (NAFTA), for instance, because he believes both trade pacts will have dynamic effects on the economy, particularly by boosting export-related jobs. Dynamic calculations are the only reason these far-sighted treaties make sense: Anyone who truly believes in a static model would not be able to see beyond the short-term loss of tariff revenue imposed by NAFTA and GATT and would oppose those treaties on grounds of fiscal responsibility.

But that would have been a major error. Since NAFTA went into effect on Jan. 1, the US expected $8.9 billion more in goods and services to Mexico than it did in the first nine months of 1993. The indirect tax gains from that jump went a long way toward making up for the approximately $587 million in tariffs levied in the same period under the old trade regime with Mexico.

Problems with static scoring

Advocates of the dynamic model point out that static scoring has its own problems. ``A static estimate is by definition wrong - the only question is by how much,'' says Michael Boskin, former chairman of the Council of Economic Advisers and a professor at Stanford University.

The real danger of static scoring, however, does not lie with its predictive inaccuracy, but rather with its bias toward higher taxes. Static scoring - which assumes that a 10 percent tax hike always results in 10 percent more revenue and that a 10 percent tax cut always results in a 10 percent loss in revenue - exerts a constant pressure toward ever-higher tax rates and a deep aversion to cuts in rates.

If dynamic scoring's advocates want to sell their product politically, they first have to respond to Rivlin and other critics who worry that macro-level dynamic scoring will be used to justify tax cuts that could worsen an already appalling budget gap. White House economists emphasize that static scoring is useful for maintaining budget discipline, although it is ``not without shortcomings,'' as Sen. Pete Domenici (R) of New Mexico puts it.

Mr. Boskin accepts this concern. Under dynamic scoring, ``every single industry will say their tax cuts will pay for themselves.'' But these concerns can be addressed. Representative Kasich and his colleagues must propose a budget model that is conservative in its estimates. They must demonstrate they have the discipline to resist overly optimistic predictions and self-serving pressures. With those cards in hand, they should push for this injection of reality into a federal budget process that badly needs it. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.