What’s really meant by Dynamic Scoring
GIVEN that The Guardian has already given us the screaming hysterics article about this dynamic scoring of tax changes perhaps it’s about time someone explained what is really going on?
OK, starting right at the beginning, the most important thing to know about economics is that incentives matter. Changes in tax rates are changes in incentives so they matter.
When we do static analysis of tax changes we just assume that no one changes their behaviour in response to these changes in incentives. YUoiu know, like everyone would keep smoking the same mount if ciggies went up by another £5 a pack tomorrow? And there definitely wouldn’t be any smuggling in from the Continent, no Siree!
Well quite, that’s totally mad doing it that way. So, what we want to do is dynamic scoring. So, what’s our best guess about what people are going to do if we change tax rates? So, well, you know, so we can work out how much tax we’re going to get from changing them?
No, this definitely can be abused because you do have to make assumptions and amazingly assumptions seem to always work in favour of the ideas that the bloke who is making the assumptions already likes. But still, we do know that static scoring is wrong.
BTW, no, it isn’t true that all tax cuts all the time pay for themselves. %This isn’t a prelude to some mythical free lunch. But a reasonable guess (roughly adapted from US figures) is nthat perhaps 30% of a cut in the 40 p tax rate would pay for itself through higher growth. The other 70% would be a real loss of revenue to the Treasury.
Do also note that it works the other way as well: just because we say we’re putting the income tax rate up doesn’t mean that we’re going to get all the money we’re counting on.
But that’s what dynamic scoring is: just taking account of what we all know to be blindingly obvious. People do change their behaviour in the face of changed tax rates. So we want to know by how much?