This is one of those things where I simply cannot understand why anyone is complaining.
The current method of assessing the impact of tax changes on the real economy is relatively primitive. Six years ago, a senior Conservative politician complained that Treasury officials assumed, in effect, that any change in tax rates would lead to an “exactly equivalent” change in revenue. He called for greater sophistication in tax impact assessment, saying that the current system “fails to take into account the broader economic consequences of tax changes. It is difficult to know exactly what those dynamic effects are – how big they are, and when they impact on tax revenues.”
That politician was George Osborne, and it appears that his enthusiasm for what is generally known as “dynamic” tax impact assessment may finally be getting somewhere.
Well, yes, of course.
If we put up fuel duty then we do want to know what the effect on demand is going to be. We know that in the short term at least fuel demand is inelastic. So it won\’t drop much: but the very reason we\’ve got that fuel duty escalator is to reduce demand in the future. So our predictions of revenue should include that.
Similarly with booze and fags taxes: demand is inelastic which is why we an tax them so highly. But it\’s not entirely inelastic, not with the personal import option, so we should indeed measure the change in demand and thus the yield of the tax. New York City recently found that a rise in the cigarette tax reduced total revenue for example.
And of course, if we\’re doing this with tax rises then we should be doing it for tax cuts as well, no?
So why would anyone complain at all about dynamic scoring?