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May 15, 2001

May 15, 2001 | News Releases on

Rate Cuts, Not Rebates, Formula For Stronger Economy, Analysts Say

WASHINGTON, May 15, 2001-Some federal lawmakers say the $100 billion they've budgeted for immediate tax relief should be delivered in the form of rebates. But a new Heritage Foundation study shows that tax rate reductions would be a far better way to provide the stimulus the American economy needs.

Rate reductions would produce more jobs, prompt more spending and investment and lead to quicker and more lasting economic growth, writes Bill Beach, director of the Center for Data Analysis (CDA) at Heritage, and Mark Wilson, a research fellow in Heritage's Roe Institute for Economic Policy Studies.

Using an established macroeconomic model, Beach and Wilson compare a rebate program that would pay $52 billion this year and $51 billion next year with tax rate reductions that would do the same. They found the tax rate cut would produce 180,000 jobs in the first year, compared to only 70,000 for rebates. Through two years, the rate reduction would generate 352,000 new jobs, more than double the 158,000 spawned by rebates.

Even consumer spending-generally viewed as the main selling point for rebates-would climb more with rate reductions, Beach and Wilson found. Rate cuts would spark $38 billion in additional spending, compared to $33 billion for rebates. And with the more permanent stimulus of a rate cut, investment would grow by a third more than it would with rebates-about $7.6 billion vs. $5.2 billion.

And when all the numbers are in, rate cuts look significantly better. By the end of 2011, gross domestic product (adjusted for inflation) would be $95.9 billion higher with tax rate relief compared to just $5.2 billion for rebates. "That amounts to a mere rounding error in a $12.9 trillion economy," say Beach and Wilson.

Congress should resist the politically popular urge to send checks to taxpayers this year, Beach and Wilson write. Instead, lawmakers should make a down payment on long-term tax reform and make other pro-growth tax policy changes. If Congress chooses to use the $100 billion to cut tax rates now, economic growth rates would increase by 0.1 percent to 0.4 percent for this year, and the 11-year program that could produce 1.6 million jobs will begin on sound footing.

"Tax rebates are attractive because constituents get a check in the mail," Beach acknowledges. "But rebates have little economic impact. To choose them over rate reductions would squander opportunities for Congress and the president to boost both short-term and long-term economic performance with sound tax policy."

In another Heritage tax analysis released today, CDA analyst Rea Hederman shows how many people in each congressional district would benefit if the Senate approves a House bill that eliminates the marriage penalties in the tax code and doubles the child tax credit.

Hederman says eliminating the marriage penalties would benefit 25 million married couples across the country-ranging from 27,496 couples in New York's 16th District to 80,846 in Minnesota's 6th District.

The House bill, approved March 29, would change the standard deduction for married couples-now $7,600-to twice that of single taxpayers, or $9,100. It also would raise the threshold for the 28 percent tax bracket from $45,200 to $54,100, which would save families in that income range almost $1,200 per year in taxes.

The child tax credit would increase from $500 per child to $1,000 under the House bill and allow families to receive a refund if the increased credit exceeds their tax liability. These provisions would benefit 40 million children, Hederman says-from 42,451 in New York's 14th District to 172,713 in Nevada's 2nd District.

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