The Heritage Foundation

News Releases on Taxes

March 8, 2001

March 8, 2001 | News Releases on Taxes

House Bill to Cut Tax Rates Would Boost Economic Growth, Analysts Say

WASHINGTON, Mar. 8, 2001-As Congress takes up the first portion of President Bush's tax-cut package-legislation that would lower income tax rates and collapse the current five brackets into four-a new paper from The Heritage Foundation shows it would spark a significant amount of economic growth, sharply offsetting its "cost."

The legislation, H.R. 3, would trim the current five-tiered tax rates, which top out at 39.6 percent for the wealthiest taxpayers, to four lower brackets with a top rate of 33 percent. It would also make the first reduction in the lowest bracket retroactive to Jan. 1, 2001 and eliminate the impact of the alternative minimum tax on the refundable child and earned income credits.

Mark Wilson, William Beach and Rea Hederman of Heritage's Center for Data Analysis found the measure would create 917,000 more jobs than contemplated in the Congressional Budget Office (CBO) baseline forecast. It would increase disposable annual income for the typical family of four by some $2,600. Overall, the study estimates, consumer spending would rise by an average of $90 billion annually and savings would increase by an average of $48 billion. The legislation would lead to more investment as well-some $25 billion annually through 2011.

The Heritage Foundation analysis also shows the proposal would lower federal tax revenues by only $634 billion over the next decade-far less than the $948 billion estimate from the Joint Committee on Taxation (JCT). Heritage analysts also estimate that tax-cut-induced economic activity would raise the gross national product over the same period by $137 billion more than the CBO has forecast.

The Heritage analysis is based on a "dynamic" model of the U.S. economy widely used by federal agencies and Fortune 500 companies. The model takes into account predictable changes in consumer behavior that usually follow tax cuts. According to the CDA analysts, estimates produced by the dynamic model are far more accurate than those generated by "static" models-such as the one used in the JCT study-that assume tax cuts have no effect on spending, saving and investing.

Critics of the proposal who have used the JCT analysis to claim tax cuts would wreck the federal budget are "way off base," Beach says. The Heritage study found the House measure would pare the share of gross domestic product devoted to taxes from this year's 20.6 percent (a peacetime record high) to 19.6 percent over the next decade. Meanwhile, rising employment and payroll tax revenues would add $53 billion to the Social Security surplus. And, Beach said, the national debt would fall to "the lowest level practicable" ($818 billion), and the treasury still would accumulate more than $2.3 trillion in surpluses.

"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. "And the more accurate they are, the more they call for lowering taxes and simplifying how they are calculated, paid and collected."

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