Heritage Foundation Leadership for America

On April 1, Congressman Paul Ryan (R-WI), the ranking Republican on the House Budget Committee, introduced the House Republican Budget Alternative to budget initiatives of the House Democrats and President Barack Obama. The Republican alternative calls on Congress to make significant policy changes across a wide spectrum of public policies from health and retirement security to budget process reform.

The alternative's $3.8 trillion budget also contains significant changes to federal tax policy. The Republican's propose

• permanently extending the tax relief measures 2001 and 2003,
• allowing taxpayers to choose between paying taxes under the current tax code or one with just two brackets, a standard deduction, and personal exemptions, and
• reducing the corporate profits tax rate from 35 to 25 percent.[1]

Republican House Leadership turned to the Center for Data Analysis at The Heritage Foundation to prepare an economic analysis of their tax proposals. CDA analysts first used the CDA Individual Income Tax Model to estimate the "static" effects on federal tax revenues of these tax changes. This model simulates the changes in tax liabilities by simulating the new tax payments of individuals in a microsimulation database. Analysts used the results from the Income Tax Model to alter tax rate and associated behavior variables in the Global Insight U.S. Macroeconomic Model,[2] a large structural model of the U.S. economy. Simulations based on these altered settings produced the economic output that is contained in this report.

A special thanks goes to Guinevere Nell for her outstanding work on the microsimulation of the tax policy proposals.