Yesterday, our editorial noted the strange rash of liberal Obamacare defenders suddenly becoming big fans of dynamic scoring — the idea that budget estimates should account for changes in behavior due to tax incentives. Conservatives have argued for years that the estimated budgetary impact of tax rate cuts should actually be smaller. Rate cuts spur productivity and growth, generating more taxable income.
Until now, liberals have written off this theory as supply-side hogwash. What changed? Obama said he wouldn’t sign a health-care bill that added a dime to the deficit. Obamacare defenders needed to come up with scorable revenue without (directly) raising taxes on the middle class, hence their sudden embrace of dynamic effects.
Rather than welcoming them to the supply-side fold, however, we have every reason to suspect their fishy accounting. The traditional argument for dynamic scoring rests on the principle that tax rate cuts drive growth and generate taxable income. Supply-siders have occasionally overstated how much taxable income this rate cut or that one might generate, but the connection between rate cuts and growth is nevertheless well-established.
By contrast, the case for dynamic scoring as applied to Obamacare rests on much shakier foundations. Megan McArdle explains:
I got some clarity from sources in the know about how the CBO calculated that somewhat cryptic “Other Effects on Tax Revenues and Outlays” that generates $83 billion to defray the costs of the program over ten years. Basically, the CBO’s assumption is that the attractiveness of the subsidies will encourage several million people to drop their employer insurance and buy subsidized insurance on the exchange. Their employers will pay them more money instead, and this money will be taxed.
Similarly, the Joint Committee on Taxation, which calculated the revenue from the excise tax, assumed that almost three quarters of the benefit would come from employers driving down their insurance costs, passing on the savings to their workers as compensation, and that compensation getting taxed. And because the pressure to cut costs is expected to gather steam over time, the effect is larger in the out years–by 2019, the JCT predicts $46.3 milllion worth of revenue, but only $7.9 million of it comes from people actually paying the tax. The rest is dynamic effects.
The CBO projects $180 billion in “gross cost” of the coverage expansion–i.e., what the government will spend on Medicaid and SCHIP expansions, operating the exchanges, and subsidizing the purchase of standardized policies therein. It turns out that about $58 billion, or just about one third of that cost, is being paid for by expecting employers to substantially lower their costs and pass through all the savings to their employees, who then pay taxes on them.
As revenue-raising mechanisms go, this is pretty indirect. And with so many links in the chain, you can see lots of places where this could go wrong. What if employers just cut their costs and don’t raise their employees wages, because they’re in a dying unionized industry? What if they shift workers to other forms of tax-deferred compensation, like 401(k) matching or HSAs? What if smart lawyers figure out a way to structure health plans to avoid the tax? What if all the people who leave employer insurance for the exchange, or have their benefits cut, are low wage workers with low marginal tax rates?
That’s a lot of what ifs… and a lot of dimes added to the deficit if they don’t pan out.