The Heritage Foundation

WebMemo #210 on Taxes

February 17, 2003

February 17, 2003 | WebMemo on Taxes

The President's Economic Growth Plan Contains Benefits for AllAmericans

Remarks Delivered at the Greenbrier Retreat
-February 7, 2003

All we've heard in Washington over the past three weeks is how President Bush's economic plans blow a hole in the budget. Critics claim that the plan will increase the federal deficit by at least $680 billion over the next ten years. They claim that it does nothing for economic growth. And, they argue that it's a laundry list of tax cuts for the rich.

These critics are dead flat wrong on all three fronts, but they are especially wrong about the federal deficit. Economists, including those of us at the Heritage Foundation's Center for Data Analysis, who routinely use economic models to analyze tax policy changes, are finding, for example, that the deficit under President Bush's plan grows by less than 50 percent of this amount between 2004 and 2013. Why the difference? Amazingly, the deficit numbers that critics like to use do not include the effects that President Bush's economic plan will have on the economy and, thus, the effects of the economy on federal finances. Rather, they multiply lower tax rates times the pool of taxable income prior to passage of the President's plan to come up with their estimates of lower revenues and higher deficits.

Everyone should know, however, that some tax policy changes, especially tax cuts, lead to more employment, higher wages, and a stronger economy. That type of economic response means that federal revenues will not be as affected as a purely static analysis would indicate. Moreover, the federal deficit will certainly not be as large as the estimates one could easily perform just on an abacus.

Rather than blowing a hole in the deficit, this plan plugs key holes in the economy, strengthening economic growth and assuring that families as well as governments have the resources they need to address pressing problems. Indeed, the President's plan provides Congress and the American people with a golden opportunity to achieve at least three major goals.

First, the plan contains a number of pro-growth components that will bring relief to the economy now and over the next ten years. These components (ending the double taxation of dividends and savings, accelerating the tax rate changes of 2001, and expanding expensing for small businesses) mean over a million more jobs in 2004 alone and directly touch the pocket books of the entire adult U.S. population.

Second, the plan marks a major step forward in reforming our badly broken tax system, which lies like a yoke of lead around the neck of American workers, investors, and families. Congress has within its grasp the most important change in federal tax law since it put death taxes on a glide path to repeal: The first session of this Congress could conclude with law that eliminates the double taxation of investment and cuts the double and triple taxation of savings. Taxing anything more than once is bad tax law, but taxing time and again the juice of the economy is just nuts.

Third, Congress can come into the 21st century by adopting the tools that make CEOs of Fortune 500 companies and many state governors much better executives. The Congress can use the current tax debate to demand more accurate scoring of tax bills by combining the current "static" scoring methods with those that include the reaction of the economy to Congress's tax policy moves. The staff of the Joint Committee on Taxation is ready to use their economic models for this purpose, the Rules of the House insist on it, and the historical evidence is overwhelmingly in favor of dynamic scoring.

Given all of these golden opportunities, it is exceedingly strange to hear many Members and their key advisors groaning about how the President's economic policy proposals a) do little for economic growth, b) are focused on helping only rich taxpayers, and c) produce record deficits. This "numbers critique" of the plan has dominated the news over the past three weeks. It shouldn't have done so, since it is entirely wrong.

What does the plan do for economic growth?

First, President Bush's plan spreads its economic and tax benefits very widely, indeed.

  • Except for those unmarried, childless taxpayers whose entire taxable income falls within the new 10 percent tax rate; the Bush plan gives every taxpayer a tax break. That's 123 million taxpayers as of our latest count in 2002.
  • For the 8.1 million unemployed Americans, whose personal economic setbacks may have deprived them from being a taxpayer in 2002, the plan has very good news: the plan conservatively creates 276,000 jobs in 2003 and 1,014,000 in 2004, when it is fully in effect.
  • For the nearly 40 million seniors worried about the health of Social Security and Medicare, the Bush economic plan creates so many jobs for younger people at good wages that the trust funds get over $100 billion in windfall revenues between 2003 and 2012 that they won't if the plan is not enacted.
  • For the 80 million investors, economists estimate that the President's dividend tax proposal will raise the average value of stocks by 10 to 15 percent. That increase today is real wealth tomorrow, regardless of whether the investor receives dividends or holds the stock for a capital gain.
  • About 43 million married couples will see nearly every bit of their tax penalties from being married disappear.

And, taxpaying parents of about 26 million children will see the child tax credit increase from $600 to $1,000 for each qualifying child.

Second, President Bush's economic plan delivers on its promise of higher economic growth.

  • The rate of economic growth jumps in 2004 from a forecasted 3.3 percent to 4.1 percent. That increase means that an additional $94 billion is added to Gross Domestic Product. In 2005, the GDP is $115 billion higher; and the level of GDP in each succeeding year is over a $100 billion higher than in an economy without the proposed tax changes.
  • This higher level of economic growth translates into more after-tax dollars for workers and families. We estimate that the increase in after-tax income will give each taxpayer an additional $1,010 to spend in 2004. That's $2,000 more for a married couple.
  • These additional after-tax dollars fuel a sharp increase in consumption expenditures: we expect the spending of households to grow by $108 billion in 2004 and $132 billion in 2005.
  • The Bush economic plan has a very significant effect on personal savings, a feature of American economic life that could use a lot of help. Our economic model is telling us that the President's economic plan would increase personal savings by $88 billion in 2003, $172 billion 2004, and $81 billion in 2005.

What are the implications of this proposal for dynamic scoring?

It should be apparent that just relying on the accountants and other abacus rattlers to tell us about the "cost" of tax policy changes guarantees that we will have a distorted view of how Congress's work affects taxpayers. When critics of the plan argue that deficits skyrocket, we should ask them whether their calculations include the reaction of the economy to policy change. They should answer with more than just the assertion that interest rates will rise.

The Washington policy community is well positioned to test the possibilities for dynamic scoring this year. The President has proposed tax policy changes that can be analyzed using a model of the U.S. economy. The think tank community has the capability of estimating the economic and fiscal effects of such policy moves. And, most importantly, the staffs of the Joint Committee on Taxation and the Congressional Budget Office finally have economic models that they can use to estimate the effects of tax policy change on the economy and on the government revenues.

About the Author

William W. Beach Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis

Related Issues: Taxes