Dynamic Scoring

Floor Speech

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Mr. Speaker, my hope is that you find this as entertaining as I did putting some of this together. Actually, let's put these boards up. We are going to actually do something that, with the rollout of the tax reform mechanics--and I apologize to everyone.

Some of this is going to be a little geeky. But I wanted to try to put some things in perspective because I have heard some and read some crazy stuff the last couple of days.

So we are going to actually do some dynamic scoring 101. And, actually, at that moment, I think I just heard thousands, if not tens of thousands, of C-SPAN watchers just turn their televisions off. But this is actually important, because every time we are heading towards working on major tax reform or other types of programs that actually have big, bold policy built within them, we get into this sort of debate.

What are the effects? What are the effects on society? What are the effects on tax revenue? What are the effects on labor participation? What are the effects on our entitlement programs? And there is sort of this intellectual duplicity around this body. I know that is a little harsh, but we have got to be honest about it. If it were the stimulus package from President Obama several years ago, we had lots of Members on this side who actually talked about, supported, and thought the dynamic scoring models were great.

But when we actually talk about something within the Tax Code, rewriting the Tax Code, well, then dynamic scoring is just unacceptable. So I am going to ask everyone to open up your minds and first understand, when we talk about scoring, what we really mean. And we are going to touch on a handful of things, and this is going to be very elementary, sort of basics. So we are going to walk through a number of these.
And then I have a number of slides that we will get to in a moment that are more about examples of what math means when looking at it. And the fact of the matter is, there are such things as tax cuts that do not pay for themselves, but there are also such things, actually, as tax policy that do pay for themselves.
You have to just choose and be willing to work through the math, and the history of math, and stop being afraid of data around this place.

I get behind this microphone quite often and run this joke that this is sort of a math-free zone. And I am working
really hard to drag my brothers and sisters on both sides to understand that sometimes the folklore we believe in is correct, but a lot of times it just isn't.

First off, before we do some of the slides, I want to walk through some of the terms. How often do you hear us talk about the baseline? Okay, we talk about it all the time. The baseline is this--you do realize, the baseline actually does have a series of dynamic aspects when we build it. Why do you think, when we come out here every March, or like we did this last March and then again in June, all of a sudden the numbers have changed? That is a case where the world did not stay static. We didn't create a number a year ago, and that is what the world stayed.

Remember, we went through this really ugly, uncomfortable thing this year, where, in just a few months, the deficit actually grew dramatically to the point where we are almost borrowing $700 billion this year. And if we went back a year and a half, we thought this year we might be as low as $500 billion, $550 billion. So if we had stayed static, we would still be just pretending that we were at that number.

We recalculate constantly. But it is not just calculating, hey, here are the tax revenues. It is also, hey, we see this trend in number of people taking jobs; hey, we see this trend in number of people signing up for entitlement benefits. So understand, we already, for years, and years, and years, have lived in a dynamic scoring sort of model right now, and we call it our baseline.

I also want us to try a couple other things. I want us to think about dynamic scoring as not that number that is given to us but as a way of ranking decisions. So if I came to you right now and said, ``Hey, we have these things in the tax policy, and here are the effects we believe we see as we have the information today,'' think of it as a tool for making decisions, not that that number is the same number that it is going to actually produce 10 years from now.

With the best data and information we have today, if you as a policymaker--if you are blessed to be one of us who gets to be in this body saying, well, it turns out if I spend the money on this type of tax change compared to the same money on this type of tax change, I get this different effect in the size of our economy, in the number of our brothers and sisters who have jobs and employment opportunities, but also in what it effects in tax revenues.

So I know that is culturally hard for a lot of us because we all like to beat up CBO and the Joint Committee on Taxation. But in all fairness, a dynamic scoring model is a ranking model.

What is the real difference? If I asked you just to say in a single sentence we all had to agree upon a common definition of here is static, here is dynamic, the real difference is a dynamic score has calculations that reflect changes to the size of our economy, which is really important.

Now I am going to digress to one side. About once a month I get behind this microphone, and we do a series of slide presentations on how much trouble we are in. The fact of the matter is that in not that distant of a future, we will barely have the revenues to cover our entitlement costs. We are living in a society right now where about three-quarters of our spending is what we call mandatory spending--both earned and unearned entitlements--your Medicare is an earned entitlement. Your Social Security is an earned entitlement. But we also have other types that you get because you fell below a certain income or you may be part of a certain group.

But the vast majority of what we do in this body is not managing the three-quarters of our budget that is on autopilot. These are by formula. If you look at that sort of remaining 25, 27 percent of our budget, well, about a little more than half of that is defense, and everything else is what people think of as government--that is the FBI, that is the National Park Service, that is the FDA, and that is education and research. That will continue to shrink, and it is going to start shrinking fairly dramatically because baby boomers are retiring.

Remember, the peak of the baby boomer is only 60 years old right now. We have our brothers and sisters whom we have made promises to, and this body never sat down and did the hard math to be prepared for what happens when 76 million of our brothers and sisters move into their retirement benefit years.
So one of the critical reasons you do tax reform is economic growth, because without economic growth, it gets really ugly in about a decade.

I continue to be sort of shocked that my brothers and sisters, particularly on the left, who claim to be sort of evangelical advocates for a lot of this entitlement spending, aren't standing alongside of us and saying: We need to do a major rewrite of our Tax Code.

That does just a couple of things. It makes it fairer, and it makes it more simple, but it dramatically--over the next 10, 15, 20, 30 years--expands the size of this economy, because without that expansion, the math is just ugly.

A great example of this is when we talk about dynamic scoring. If you do actual dynamic scoring on what is about to happen over the next, functionally, 20 years of where we are demographically, the models don't work. The actual computer comes back to you and says: Doesn't work, doesn't work, doesn't work, because the math is impossible.

Functionally, the amount of debt to the size of our economy gets so big that the models basically say that society has collapsed. You can't float another bond, and you can't borrow money from anyone else. It comes to an end. When the computer tells you that, when the computer starts giving you a red flashing--maybe if you don't believe those of us who get behind the microphone, maybe they will believe the data.

Let's go ahead and start to walk through some of the slides. We are going to walk through a series of these ideas. I am probably going to say parts of this two or three times to have it sink in.

We have already had a number of our folks quoted in the press and others showing their cynicism towards dynamic scoring. But those are some of the very same people who actually stood in this same well and promoted the immigration reform and the dynamic scoring that was built into the immigration reform. They are the same folks who actually promoted the dynamic scoring that was built in the stimulus bill several years ago.

But they are also the same folks who actually believe things like global warming mechanisms, which are built on a dynamic scoring model, are the absolute facts of math. You can't have the intellectual duplicity of saying: I believe in this sort of modeling math for things I am ideologically comfortable with, but things I am ideologically not comfortable with is not true.

It is math. Let's try one more time because if we are going to come to policy decisions, we have got to stop living in sort of a math-free zone.

I am doing this as more of an example. None of this is actually policy in the tax reform that those of us on the Ways and Means Committee are so incredibly blessed to be working on. It has been the most interesting year of my life grinding out this math. I can't tell you the number of times that I thought I had a brilliant idea, you work it out, and you find out that the really smart people around you had all figured out all sorts of ways to get around your Tax Code changes.

So sometimes you have got to be humble and just understand that what we are doing is tough. It is complicated. If you make one change over here in the Tax Code, then it turns out it affects over here and creates leakage over here. So that is why you have to do this unified theory.

Just so we see this conceptually, if I came to you right now and said, Hey, we have this much money--I think in this model it was $70 billion or $60 billion. The actual dollar amount isn't that important. If I came to you right now and said, ``You have this much money, you have got to make a Tax Code change with that money,'' if we did a static score, then the model says it costs you that much money. If you spent $60 billion on this over the 10 years, then it costs $60 billion.

Then when we do the dynamic scoring, it turns out that not all tax changes produce the same amount of economic growth, even though it may promote fairness, it may promote simplicity, and there may be some things we haven't calculated.

So on this one, if we take a look over here, this was actually something we took from the Tax Foundation's website. I encourage you to go there. It is a nonpartisan group, and it has some really interesting modeling.
If we functionally doubled the child care tax credit to a couple thousand dollars, it turns out the model over 10 years functionally adds almost nothing to GDP growth. Now you will want to try to model it saying: Does it change birthrates? As you know, we are in a societal crisis right now where our birthrates are falling so low that mathematically, in about 20 years, we are going to have some real difficulties having enough taxpayers moving into society's workforce to actually pay for our pay-as-you-go entitlements.

Social Security and Medicare are pay-as-you-go entitlements. Today's workers are paying for today's retirees. If that population mix of workers moving in gets too out of whack, then the math gets really uncomfortable.
For the same costs, if I came down and in this particular model reduced marginal tax rates, or we have another one where you are going to see we are expensing, which is a type of sort of depreciation that you can take all at once, then all of a sudden this one gets me almost no GDP growth. But the same dollars at that get me well over a point of additional GDP growth.

If I am standing in an event back in Arizona and say, ``We are going to spend $60 billion, and we are going to double the child care tax credit,'' that helps me get re-elected. But if I come and say, ``We are going to spend $60 billion changing the marginal tax rates for corporations, or the exact same money for expensing so businesses, particularly smaller businesses, buy new plants and equipment so we get more efficient so we have more growth so more people have jobs,'' then intellectually we know this is really important for everyone in our society. But this one down here is easier to talk about and easier to get reelected.

That is the tough thing here when we live in a world of these pithy, little sound bites, where we say these quick, little simple things then march off and the intellectual discourse of, hey, it is harder than that, we need to find a way to be simpler and fairer, but we also have to be rational on what creates the next generation of economic growth so our brothers and sisters actually have jobs, they have chances to save, chances to have money to put their kids through college, and even their own retirements.

We are going to walk through a few more of these examples, and then I have some actual data examples of where this is actually happening in our lives.

Now, this slide is a little bit on the geeky side, so forgive me, but this is dynamic scoring 101. All this slide I really want you to look at is, when modeling, it is not only where the money goes, but did it increase the capital stock, and, therefore, there is more capital in these businesses and in these organizations to expand and buy equipment and provide employment, or did it not?

But there is also: Did the tax change that creates that new capital stock stay in our Tax Code long enough that the next generation of new, more efficient equipment, new productivity moves in? We actually have some really interesting examples that have been produced datawise on what happens if a Tax Code change phases out. We see this a lot where we have done these, hey, this marginal tax rate for business is for 5 years, and then it goes back to the old higher rate. Or what we are struggling through right now is how to get as much economic growth as possible if we create a type of expensing or accelerated type of depreciation, and what happens in the future of that? Does it phase out? And if it does phase out, what are the economic effects?
If you take a look at the green line, you can see what it actually meant both for GDP growth and also for attached within those numbers are revenues. Do you see the red line? So we both have a sympathetic curve here, and then the value of that actually fades away and actually falls, in some occasions, below what would have been a static score because you get the spike of people saying: We have to invest, we have to do this right now, and now we have to back off because of next year.

A good example is if I came to you right now and said: Today you have this tax rate, but 2 years from now we double it, what are you going to do with your life? We are going to work like crazy this year, and that 2 years from now, you are planning on taking a vacation year. It is human nature, and I think we have to stop pretending that the Tax Code somehow operates just outside human nature.

We will grind through some of these a little faster. At the end, we are going to talk about where you can see all these different charts. Why this is important is when you actually look at the effects of the deficit--and where this was interesting is this was just revenues taken out of society in the ACA, sort of the economic effects of what would happen when we actually did the microeconomic movement calculations, and you actually see if we did repeal those additional dollars-- because, remember, this is costing, there is an additional special tax on capital gains and what it is actually doing in economic growth.

We have a lot of slides, so I am going to try to go through some that are a little more entertaining. What we are trying to show here is what happens when you take, actually, the exact same functional cost with dynamic effects and static effects. This one is from the Tax Foundation.

The real difference is, remember that first slide we walked through where we talked about if we doubled the child care tax credit? Hey, here is our cost, and here is what it actually does. If we dynamically score it or if we actually static score it, oddly enough, it comes out almost identical because there is none of that macroeconomic change.

But if you actually dynamically score it, you will see they actually have tremendously that same spending if it were in corporate tax cuts. It has very different economic scores.

We have another slide. We will show on the one down at the end that, at the end of 10 years, we actually make revenue. The revenue line goes beyond its costs. In the 10 years, the first option does not expand. At the end of 10 years, it is actually scored as a loss. That static score is actually accurate.

There are a number of these sort of examples out there. I am going to actually go back. This is not being mean. Remember, we are operating under a principle that the dynamic scoring is as much about the money as, hey, we think we are going to have this much tax revenue or this much tax loss at the end of 10 years or the end of the year, but it is also helping us rank.

These are important. From 2003 to 2008, we had a tax change, often referred to as the Bush tax cuts, that was going to be $317 billion over 10 years. If you looked at the models that were generated back there, it was supposed to actually cost society, cost the government money. But when we actually got to the end of that time, the end of the phaseout, it actually produced $77 billion more than that tax cut actually cost.

That is just in our recent memory, but I have a number of charts here that actually show over and over and over that, if the tax cut is actually put in the right place, we get economic growth and, therefore, additional revenue from it.

There are certain things out there that do not pay for themselves. That is why we have this whole discussion of how you find balance if you are working for fairness, if you are working for simplicity, but knowing we must have that economic growth if we are going to keep our promises here. This is just one more example.

When you actually see something like this, this first one is as if we were actually to change depreciation tables, that function. It ends up taking about $308 billion out of GDP if we dynamically score it.
Each one of these tax policies costs $32 billion. That is actually the idea. This costs $32 billion to the taxpayers.

So, if I came right now and said we need to raise $32 billion and we intend to do it in a change in the Tax Code, and then we go out there and say, all right, let's change depreciation tables to business and we take in $32 billion of additional money, what did we just do to the economy? In a static score, it says, hey, you just got $32 billion. If you do a dynamic revenue estimate, which actually does have some macro effects in there, we actually just lost $38 billion, because business slowed down.

But if you do the dynamic scoring of what it does over 10 years to the economy, that $32 billion of hopeful tax revenue actually shrunk the U.S. economy by over $300 billion. When they build this model, they are using data going back to the 1950s.

But we have an example on the other side. If you go to the far side, what if you were to disallow half of State and local taxes as a deduction? It turns out you would say that we are getting $32 billion because that is what it is written at. You end up bringing in about $29 billion, but you only shrink the economy by $19 billion.
Policywise, staticwise, they both say $32 billion in new taxes, but they both have dramatically different effects on the economy. When we actually talk about the dynamic scoring, it is both actually on the tax-raising side as much as the tax-cutting side.

The same sort of concept here, but what if we did it going the other direction? Actually, the same slide we just did, what does that mean in the percentage of GDP, if anyone is sort of thinking in that fashion.
The first one, where we actually changed the depreciation tables, we took away of the ability of businesses--particularly, smaller business--to depreciate. It ends up shrinking the U.S. economy almost two points over those 10 years. State and local taxes are actually less than, I think, 0.16 of a percent of GDP over those 10 years.

So when you actually hear the phrase ``tax cuts don't pay for themselves,'' or, ``you don't get the revenues expected,'' that is actually true, except for properly designed and properly targeted.

This is actually the flip side of what we just did. Remember, we just did two boards that showed both the revenues and the actual percent of GDP we raise taxes. How about now if we do sort of the exact same thing but we do it as a tax cut?

Once again, you are going to actually see--and I am sorry, I put additional notes to make it understandable--that not all tax cuts are the same. In this case, I am going from one end to the other side.

So let's say we go to the full end and we did full expensing. So instead of a depreciation table where, over the 7 years, it is this piece of equipment, or 10 years, whatever it may be, what if you could take the value of that almost immediately? In a dynamic model, it is adding a couple hundred billion dollars to the size of the economy.

But if those same dollars, the same amount was spent on, let's say, over here, we cut the bottom tax rate, that might be the appropriate thing to do for societal fairness. But we have to be cognizant, when we are calculating, what that means in GDP growth. You can see the blue here in the end, and the blue here is positive, but barely. That is over 10 years.

This makes it hard because, so often, the very tax policies that are good for us in our reelections may not actually be best for what is good for society and its opportunity for jobs and economic growth.

This is now sort of the exact same slide, but in the percentages and sort of understanding, when we doubled the child care tax credit or we lowered the individual brackets, maybe doubling the child care tax credit actually has an effect on birthrates. That would be terrific for society, and particularly for the future of our ability to pay into our entitlements, but if you are looking for GDP expansion and economic growth, it is marginal.

The expensing or the corporate tax cuts, when you see those on there,
you actually see we have substantially more of what they call capital stock. That is the money that is used to buy new equipment to get more productive, to hire more people, to raise their salaries, and for all of us to have more opportunity.

I think we are going to make this our last one. This is the easiest one to sort of get our heads around, and it is the crispest of all.

Say you are a fellow Member of Congress and I come to you and say we have $70 billion, over 10 years, that we can plug into on the Tax Code, we have that much capacity. Where do we put it that is best for our society?
The initial instinct is to have that discussion of, well, what if we were to cut the bottom Federal tax rate? It is wonderful for our hardworking brothers and sisters who are at the lowest tier of income.

It would be wonderfully fair. How about if we put that into expanding the child care tax credit, expanding that? How about if you put that money into expensing?

If you get in front of an audience and we did an audience vote, what do you think we would get?
The fact of the matter is, when you look at the models, what we have learned from the dynamic scoring, some may get almost no economic expansion. We may get economic fairness, which is a laudable goal. But, ultimately, over the next decade, I need my brothers and sisters in this country to have more job opportunities, more ability to be employed, putting that money into expensing so we get more productive as a society in buying new plants and equipment and machinery to make us more productive so we can pay people more, so we have the ability to save for education, for their retirements. That actually has over 5 percent additional expansion of the size of our economy.

These are the types of issues that those of us on the Ways and Means Committee have been struggling with over the last year and are going to struggle over the next month as we try to find that balance of what is simplicity, what is fairness, but also what maximizes economic growth.

Just as a couple of little last pieces here to sort of understand this. I am begging for those of us who are going to be in this sort of battle, debate, that we do our best to sort of be intellectually honest about what we are talking about.

A good example is the number of dollars we are talking about right now in rewriting the Tax Code is, I think, 1 percent or so of GDP, maybe less than that. The stimulus from several years ago was 7 percent of GDP.
We have had some folks who are criticizing this over here and saying you intend to dynamically score that, but were almost giddy about spending and scoring actual spending over here that we learned later did not allocate well.

There is a concept, if I had a dollar, where would it be spent best to grow society, if I gave it to you as an individual, as a businessperson or an entrepreneur, saying: Where would you put that? Would you try and take that dollar and do something with it that grows the economy?

Or we have the other side over here. When government spends it, we have this bad habit of spending money on things that are often politically driven and that don't necessarily have the same type of economic expansionary effects. It is this thing called price theory, where money gets allocated into society. Who is better at allocating that dollar?

I will make you an argument that individuals in the market actually have a long history of doing it much healthier, much better.

As we finish what we will call Dynamic Scoring 101, what did we learn? The scores are incredibly important in making decisions about how you allocate resources, both on raising taxes, lowering taxes. Where does it have the most impact? Where does it do the most damage? Where does it do the most good?
Dynamic scoring is actually a ranking mechanism, because the ultimate number, we are never going to have enough information to be perfect, but all we can do is take the information we have today and try to find a way to say, with today's information, this use of these resources creates this much more opportunity in our society than spending the same dollars over here.

So when we are going to get into this debate about what the dynamic scoring is providing those of us who are making the policy, understand, it is sometimes more of choosing A over C, because A produces more expansion in our society, more opportunity, even though they cost the same, than sometimes looking at the dollar amounts.

Often, as we saw on some of these boards here, the dollar amounts, if we statically score it, are the same. They just have different effects.

This is really, really important. So think of dynamic scoring as just that: it is the scorekeeping of how we all do this.

For everyone that is actually interested in this, I will strongly encourage you to go to the Joint Committee on Taxation's website. I believe they actually have a tab there that actually geeks out a little bit on what dynamic score is, particularly if you are an accounting or quant major. You will love this stuff.

Also, the Tax Foundation, which is nonpartisan. We have actually borrowed lots of information from them. They actually have some really great examples of, when we, over the years, have made certain types of policy decisions, what has been good for society and where we have actually missed and not gotten near the numbers that we have promised.

Do understand that, when we take a look at what we did in 2003, the U.S. economy ended up being 4.6 percent larger by 2006. So, from 2003 to 2006, we actually were 4.6 percent larger--I know these are a little bit geeky--than the models back then provided for.

It is not that the models were bad and evil. They just didn't have all the data. But they still provided an opportunity for the policymakers, back in 2003, to actually make their decisions.

So I hope--actually, if anyone actually found this interesting, please write and tell us. If you are now bored out of your mind and we helped you sleep, please let us know. But the reality of it is, what is about to happen in the debate over tax reform is going to have a lot of really technical, really complicated debating points in it.

As I learned yesterday, when we were rolling out some of the math, some of our brothers and sisters who desperately do not want us to have a win decided that zero was a tax hike. I just beg of everyone for at least on this issue, if we can sort of pull our partisan rage away and just sort of focus on the working population of our society and how we help and also how do we help for the future so my 2-year-old daughter, so your children, so my family that may be heading towards retirement, everyone has a fair chance. And that fair chance can only happen if we really start to grow this economy and start to grow it fairly dramatically.
Mr. Speaker, I yield back the balance of my time.

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