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January 28, 2003

wm195: The Real Growth Factor: Scoring Bush's Tax Cut Proposal

By and

Earlier this year President George W. Bush unveiled a multi-faceted proposal to improve the nation's economic growth. One of the most important features of his plan calls for abolition of the current federal double taxation of corporate dividends paid to individual shareholders.

Critics of the plan charge that it will cost the government too much money. However, they are making a fundamental mistake.  By relying on a defective methodology to estimate the proposal's cost, they are ignoring the economic growth and job creation that will be brought about by ending federal double taxation of corporate dividends.

Both the United States Treasury and the Urban-Brookings Tax Policy Center have released exaggerated cost estimates of President Bush's plan. The Treasury says that it will cost $364 billion over the next ten fiscal years (2003-2012); the Tax Policy Center says it will cost $330 billion. Both of these estimates are based on a "static" approach that ignores the economic effects of the President's plan.

The Center for Data Analysis (CDA) at The Heritage Foundation used a sophisticated reality-based scoring method to evaluate the President's dividend taxation relief plan. Reality-based scoring recognizes that a stronger economy generates more tax revenue. It therefore estimates the economic growth and job creation that would come about from tax relief proposals such as the President's.

A preliminary CDA analysis of the President's dividend tax relief plan finds that it would:

  • cost a total of $102 billion over 2003-2012, instead of upwards of $300 billion;
  • increase the employment level by an annual average of 311,000 taxpaying jobs between 2003-2012;
  • increase Gross Domestic Product (GDP) by an average of $40 billion between 2003-2012;
  • increase purchases of business equipment by an average of $32 billion between 2003-2012.

President Bush's proposal recognizes and solves the real economic problem facing the country: slow growth. Abolishing the double taxation of corporate dividends produces conditions for stronger growth.

In the real world, tax policy exerts a significant effect upon economic growth. This growth, in turn, affects tax revenues. The Tax Policy Center can ignore this feedback effect in its static analyses. However we prefer to live in the real world.

Alfredo Goyburu is a policy analyst in the Center for Data Analysis and Andrew Olivastro is senior Web writer, at The Heritage Foundation.

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