Imagine that you own a sweet donut shop,
and say you sell 100 donuts every day at a $1 each.
You'd make a $100 a day, right?
Now say you raised the price of your donuts to $5 each.
Would you make $500 a day?
Maybe, but maybe people wouldn't buy as many donuts at $5 each.
So, what if you lowered the price of the donuts to 50 cents each.
Yes, you'd make less money per donut,
but you'd probably have a lot more customers.
Seems like a simple part of economics, right?
Well simple or not, it's not how the government views taxes.
Whenever Congress is trying to calculate
how much money they'll get from taxes,
they use what some people call static scoring.
That means that according to Congress’ estimates
every tax cut means lost revenue,
and every tax hike means more money for the government.
Which isn't always true.
Just like every increase in the price of donuts
doesn't mean more money for the donut shop.
After all, who's going to buy a $300 donut?
All of this matters because in a weird way
Congress' oversimplified model is holding us back,
because if you don't estimate the economic effect of taxes,
you can't make good policies.
Well there is a better model, but Congress isn't using it.
A dynamic scoring model focuses more on economic growth.
A dynamic model calculates the broader effects of tax policy
on the things that produce economic growth,
such as how tax policy affects the cost of labor
and the cost of capital investment.
Higher taxes on labor means fewer jobs at lower wages.
Lower taxes on labor means more of those jobs at higher wages.
Higher taxes on capital such as buildings and ovens
means less investment in those things.
And lower taxes means more.
Well more capital and more labor means more growth,
and better living standards for American families.
And after all, isn't the point of tax reform to grow our economy,
so Americans can have more opportunities?
Critics of dynamic scoring resisted
because economists don't always agree on the details,
but isn't trying dynamic scoring better
than using a model we know is wrong?
After all, this isn't a donut shop we’re talking about.
It's our country.