The Heritage Foundation

News Releases on Taxes

February 26, 2001

February 26, 2001 | News Releases on Taxes

"Cost" of Bush Tax Plan Far Lower Than Critics Suggest, Analysts Say

WASHINGTON, Feb. 26, 2001-The tax cuts proposed by President Bush will "cost" the Treasury far less than either the administration or the administration's critics contend, a new Heritage Foundation paper says.

Because large federal tax cuts usually spark economic growth, Heritage analysts Mark Wilson and William Beach estimate the cost of the proposed tax package at $939 billion-more than $650 billion less than the White House estimate and more than $1 trillion below the figure claimed by the Center on Budget and Policy Priorities.

Under the Bush plan, the five current tax brackets would be collapsed into four and lowered. The child tax credit would be doubled to $1,000 per child, and the "marriage penalty" would be reduced. Taxpayers who do not itemize would be able to deduct charitable contributions. The plan would phase out the estate tax over eight years, and make permanent the business "research and experimentation" tax credit.

Critics charge the proposed $1.6 trillion tax cut package would reduce tax revenue by some $2.1 trillion and increase interest payments on the national debt by $400 billion, making it harder to reform Social Security, Medicare and other government programs. But this outcome is possible only under a "static" economic model, which assumes no change in taxpayer behavior, say Wilson and Beach.

A "dynamic" model, on the other hand-one that accounts for predictable changes in consumer and business spending, as well as interest rates, income and savings-produces a more accurate estimate, they say. Using the WEFA economic model, analysts in Heritage's Center for Data Analysis found that the Bush plan would lower federal tax revenue by $939 billion, or less than half what its critics suggest.

They also found it would give the average family of four nearly $5,000 (after inflation) in additional income by 2011-and not only would save the entire Social Security surplus but leave about $2 trillion in excess revenue to be used for Social Security, Medicare or other needs. In addition, it would eliminate the federal debt by 2010.

Another positive effect of the Bush plan, say Beach and Wilson, is that it would create more jobs-1.6 million more by 2011 than the Congressional Budget Office projects. This larger tax base also would generate $846 billion more in tax revenue. Economic growth fueled by the tax cuts would boost federal net interest payments by $226 billion and increase federal spending by $283 billion, the CDA analysis says.

"In short, the more you take into account the increased economic activity that tax cuts inevitably lead to, the more accurate your predictions will be," says Beach, CDA director. "And the more accurate they are, the more they call for lowering taxes and simplifying how they are calculated, paid and collected."

Static models, he points out, predicted the tax cuts enacted in 1963 under President Kennedy and in 1981 under President Reagan would reduce federal revenues, but both produced substantial increases.

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