Dynamic scoring of taxes

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?

5 thoughts on “Dynamic scoring of taxes”

  1. They are whining because it upsets:

    a) their carefully constructed (in order to produce the ‘right’, or should that be ‘left’ results) models;

    b) their infantile prejudices;

    and because the myth about Osborne is that he is a staggeringly incompetent super-rich ex-Bullingdon playboy out to smash the deserving poor into the gutters of the nation. Therefore, him championing something overtly sensible is impossible. Therefore, anything he champions must be wrong.

  2. Well, the major reason for objecting to it is that it cannot be done, any more than the government can predict next year’s growth. Unless the “many worlds hypothesis” is correct and we can perfect some system of travel in both time and dimensional space- perhaps disguised as a blue police box- and thus visit counterfactual futures to compare them one to another.

    It would be nice to be able to predict which of your potential future wives would be the best partner. But you can’t do that either. It’s that problem that we travel forwards through time, facing backwards. Can’t get around that, sadly.

  3. I don’t object to it. But it is liable to political manipulation.

    If Osborne really wanted to know more about the effect of the 50% Additional Rate, he wouldn’t have announced the cut to 45% a year in advance, thereby muddying the data.

  4. Agree with IanB. For excise taxes there is a long record of price elasticities so reasonable projections can be, and I think are made.
    Projecting the “behavioural” effects of a new policy initiative is heavily subjective and therefore vulnerable to politicians’ wishful thinking.
    I rarely feel sympathy for Sir Mervyn King these days but had to agree when he stoutly refused demands from Andrew Tyrie of the Treasury Select Committee that the Bank publish detailed statistical forecasts of the effects on the UK economy of unprecedented putative events – on the grounds that by definition this could not be done.
    Worryingly, Mr Tyrie missed the point and was most indignant at Sir Mervyn’s obstructive attitude.

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