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WebMemo #231 on Taxes

March 20, 2003

A Side-by-Side Comparison of President Bush's and Senator Daschle'sPlans to Boost Economic Growth

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A new analysis shows that the difference between two major economic growth proposals -- that Congress will consider -- could not be greater as one plan eschews temporary fixes, and promises greater short- and long- term stimulus, and the other plan proposes initial tax cuts, followed with hefty tax- and spending- increases.

 

The plans are:

 

  1. President George W. Bush's plan, generally reflected in the legislative language of H.R. 2, the Jobs and Growth Tax Act of 2003, that relies on across-the-board tax policy changes to spur economic activity; and
  2. Senator Tom Daschle's (D-SD) proposal, S. 414, the Economic Recovery Act of 2003, which employs one-year, targeted tax cuts and large increases in spending to boost economic growth.

Significant differences between the two plans become all the more evident in subsequent years, based on an analysis performed by The Center for Data Analysis at The Heritage Foundation, using a structural model of the U.S. economy.

 

First Year Stimulus (see charts 1 and 2)
Senator Daschle's proposal, S. 414, does little to boost economic activity in the short run and virtually nothing in the long run. If the bill becomes law prior to July 1 of this year, it would support an additional:

  • 545,000 jobs in 2003;
  • $49 billion more in Gross Domestic Product (GDP), which would raise the growth rate for 2003 by half a percentage point over current forecasts.

President Bush's proposal, on the other hand, would support an additional:

  • 843,000 jobs in 2003;
  • $29.5 billion more in GDP, for a boost in the growth rate of three tenths of a percent over forecasts.

 

Job Growth

Economic Growth

 

Long Term Stimulus (see charts 3 and 4)

Between 2004 and 2013, the differences are dramatic and obvious.

 

Average annual employment increase:

  • 787,000 under the President Bush's plan.
  • 22,100 under Sen. Daschle's plan.

Average annual GDP increase:

  • $69 billion under President Bush's plan
  • $3.4 billion under Sen. Daschle's plan.

Unemployment

 

Business Investment

 

The two plans also differ significantly on a number of economic indicators.

  • The unemployment rate under the President's plan drops by an average of half a percent point over the 11-year period, 2003 through 2013.While Senator Daschle's proposal shaves four tenths of a percent point off of the unemployment rate in 2003, it leaves the unemployment rate unchanged in subsequent years.
  • Senator Daschle's proposal initially cuts taxes on business investment, particularly for small businesses.This initial boost to investment leads to a $7.3 billion increase in factories, equipment, and other forms of non-residential investment.However, this targeted tax cut is reversed in 2004, which cuts off further significant growth in the nation's capital stock.
  • The President's plan, on the other hand, puts a great emphasis on investment, which leads to an increase in capital stock of $10.9 billion in 2003.By the end of the 11-year period (or 2013), the capital stock is $581.6 billion greater than it otherwise would be without the President's tax policy changes.

The Democrat alternative to President Bush's Economic Growth Package consists of tax cuts, tax increases, and spending increases.The alternative cuts taxes during the third quarter of 2003, principally for small businesses.Over that three-month period, small business owners will see taxes fall by about $34 billion.During the next federal fiscal year, which begins on October 1, 2003, taxes would rise by $33 billion as the provisions expire.

 

While the plan contains these tax cuts and increases, it principally relies on significant new spending to achieve its economic growth goals.The alternative plan sends $71 billion in federal funds to taxpayers in the form of advance refunds on tax payments, again during the third quarter of the 2003 calendar year.The plan also supplies state governments with an additional $26 billion in subsidies, principally in the form of direct aid and support for state Medicaid payments.Finally, federal unemployment insurance is extended, which adds an additional $10 billion to outlays.

 

Altogether, the alternative plan increases the federal deficit during 2003 by $141 billion.While some outlays continue during 2004 and subsequent years, the tax increases of 2004 offset spending by $29.5 billion.

 

The President's plan, on the other hand, is anything but temporary.Key provisions the President's tax plan of 2001 are activated now rather than in 2004 and 2006. These accelerated elements of the 2001 plan include reductions in tax rates, enlargement of the new 10 percent tax bracket, marriage penalty relief, and increases in the child tax credit.

 

Then, the President proposes an end, presumably permanently, in the double taxation of dividends. CDA estimates show that the President's 2003-tax plan will reduce revenues by $31.4 billion during the 2003 fiscal year, and by an additional $638.4 billion over the next ten years.[1]



[1]This estimate is lower than a subsequent estimate produced by the staff of the Joint Committee on Taxation, http://www.house.gov/jct/x-15-03.pdf.

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