April 27, 2001

April 27, 2001 | WebMemo on Taxes

$1.6 Trillion is Not Enough

President Bush has proposed a 10-year tax cut of $1.6 trillion. This plan, which was first put forth in 1999 when the projected 10-year surplus was just $3.1 trillion, is intended to boost economic growth by reducing the tax burden on work, saving, and investment. Critics claim the tax cut is too big, but the evidence demonstrates that the President's proposal is very modest and should be increased.

How big is the President's tax cut?

  • With a projected surplus of $5.6 trillion over the next ten years, the President's $1.6 trillion tax cut returns less than 29 percent of the surplus to taxpayers.

  • Assuming no changes in law, tax collections over the next ten years are projected to reach $27.9 trillion. The proposed $1.6 trillion tax cut is only 5.7 percent of this amount.

  • The Bush tax cut, measured as a percent of GDP, is only about one-fourth as large as the Reagan tax cut and only about one-half as large as the Kennedy tax cut.

  • In addition to squabbling over the size of the tax cut, there also is a debate over which taxes should be cut. The President's tax cut plan quite properly focuses on supply-side proposals such as marginal tax rate reductions and death tax repeal. These proposals will boost economic performance by increasing incentives to work, save, and invest. Tax rebates, by contrast, have no impact on economic growth.

Why $1.6 trillion is too small

  • If lawmakers want to boost the economy's performance, they should seek the greatest possible reduction in marginal tax rates. The Bush proposal, while a very positive step in the right direction, does not even bring tax rates down to where they were when Clinton took office.

  • The Reagan and Kennedy tax rate reductions both triggered record periods of economic growth. To achieve similar results, the Bush tax cut should be at least as large as the Kennedy tax cut. This means the tax cut should be almost twice as large as currently proposed.

  • Even if only one-half of the surplus was dedicated to tax relief, this would mean a $2.8 trillion tax cut.

  • A larger tax cut would allow immediate repeal of the death tax.

  • Additional tax relief means there could be a substantial reduction in the capital gains tax, the tax cut that likely would have the greatest short-term beneficial impact on the economy.

Countering the Critics

  • Opponents of tax relief claim that the nation cannot afford a $1.6 trillion tax cut, but they conveniently ignore the fact that the tax cut is less than 29 percent of the projected surplus, less then 6 percent of projected revenues, and less than 1.2 percent of national economic output over the 10-year time period.

  • They also are unable to respond to the fact that the Bush tax cut is much smaller than the Kennedy and Reagan tax cuts.

  • The Center for Budget and Policy Priorities, a left-wing organization, tried to argue that the Bush tax cut was equal in size to the Reagan tax cut (if only that were the case!), but this assertion was based on two grossly dishonest assumptions:
  1. The CBBP substantially altered the Bush tax cut to make it appear bigger than it really is, adding provisions such as repeal of the Alternative Minimum Tax (AMT). Many of these additional provisions are desirable, but they are not part of the Bush plan.
  2. The CBBP then artificially reduced the size of the Reagan tax cut by pretending that the repeal of bracket creep was not part of the 1981 tax cut and then deciding that a subsequent tax increase should be subtracted from the total. These techniques are akin to assuming that Mark McGuire really hit 100 home runs in 1999 because fences should have been 25 feet closer to home plate.

Conclusion

The Bush tax cut should be modified to provide more tax relief and to stimulate the economy. This would be best accomplished by letting the lower tax rates take effect right away and by adding a capital gains tax rate reduction to the package. Under no circumstances, however, should the tax cut be reduced in size.

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy

Related Issues: Taxes