CBO Dynamic Scoring: How Obamacare’s “Poverty Trap” Impedes Economic Growth
Congressional Budget Office Director Keith Hall testified before the House Budget Committee last week about how dynamic scoring–considering macroeconomic effects of legislative proposals–affects the agency’s work. It could have a major effect on entitlement spending proposals.
Most of the debate over dynamic scoring has focused on the economic impact of tax cuts and government spending. Dr. Hall’s testimony highlighted a less discussed but equally important related element: the way that means-tested government programs lower economic growth by effectively raising marginal tax rates. For instance, a single mother making $20,000 per year might pay not only 15 cents in taxes for every additional dollar of income raised; her eligibility for food stamps, Medicaid, and the Earned Income Tax Credit might also be reduced or eliminated. The Urban Institute’s Gene Steuerle has calculated that these programs amount to a “poverty trap” for families of modest means by taking away as much as 80 cents out of every dollar in added income through a combination of higher taxes and reduced government benefits.
CBO has conducted two analyses related to Obamacare that showed that the health law would exacerbate this—discouraging work and reducing the size of the labor force. The first analysis, released in August 2010, found that the law would reduce the U.S. work force by about half of one percentage point–the equivalent of approximately 800,000 workers by 2021. The second, released in February 2014, roughly tripled that estimate to 1.5% to 2% of the labor force, or about 2.3 million workers in 2021.
As Dr. Hall noted, these are early days for CBO’s obligations of dynamic scoring for major legislation. But to the extent that debates over dynamic scoring focus on whether tax cuts or economic stimulus measures “pay for themselves” through greater economic growth, they miss an important issue. The poverty trap that government policies have created — and possibly was exacerbated by Obamacare — by providing a disincentive for people to take on initiatives that might raise their incomes impedes economic growth and hinders the ability of millions of Americans to achieve their dreams.
This post was originally published at the Wall Street Journal Think Tank blog.