Dynamic Scoring: A Back-of-the-Envelope Guide

Abstract

This paper uses the neoclassical growth model to examine the extent to which a tax cut pays for itself through higher economic growth.The model yields simple expressions for the steady-state feedback effect of a tax cut.The feedback is surprisingly large: for standard parameter values, half of a capital tax cut is self-financing.The paper considers various generalizations of the basic model, including elastic labor supply departures from infinite horizons, and non-neoclassical production settings.It also examines how the steady-state results are modified when one considers the transition path to the steady state.

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