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Press Release

    Static Versus Dynamic Scoring

    06/15/2006

    When tax cuts are proposed, government economists calculate how much they will "cost" the government--"cost" being the expected decrease in tax revenue for the state as a result of the tax cut--to inform legislators before they vote. Two very different types of calculations exist, "static scoring" and "dynamic scoring."

    Static scoring assumes the tax cuts will have no change on the economic behavior of the individuals that are effected. For example, it assumes that if $100 is taxed at 50%, producing $50 in revenue, then a lowering the tax rate to 25% on $100 will produce $25 of revenue, "costing" the government $25 in lost revenue. It assumes the lower tax rate won't encourage anyone to behave any differently than they currently do.

    Dynamic scoring ads to the calculations the predictable changes tax cuts have on economic behavior. For example, it assumes that if a 50% tax on $100 produces $50 in revenue, then lowering the tax rate to 25% will produce $25 in revenue, as static scoring predicts, but also that individuals will work more (if it's an income tax cut) or realize more capital gains (if it's a capital gains tax cut, etc.) because they will get to keep more of their money. This changed behavior will produce an extra $100, for example, which is also taxed at $25, resulting in a total of $50 in revenue, and no loss for the state.

    The history of economic growth following tax cuts, from the Kennedy tax cuts to the Reagan tax cuts to the Bush tax cuts, repeatedly shows that the static score predictions have been way off the mark (overestimating the "cost") while the dynamic score predictions have been much closer to accurate.