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WebMemo #218 on Taxes

March 7, 2003

Scoring President Bush's Full Tax Proposal

By and

Implementing the President's Economic Growth Package could generate enough growth, jobs and tax revenue to cut the real cost of the plan by 57 percent compared with "static" measures which largely ignore how people respond to tax incentives. This means the "cost" of the plan would be $274 billion, compared with static estimates of $638 billion.

Specifically under the full plan, the United State's economy would enjoy:

  • An annual average of 844,000 new jobs from 2004 through 2013. Job growth peaks in the first two years, with 997,000 and 1.03 million jobs coming in 2004 and 2005, respectively (see chart 1);
  • An annual average of $69 billion in additional GDP from 2004 through 2013,  with an increase of $84 billion in GDP in 2004;
  • An annual average of $121 billion in additional disposable income from 2004 through 2013, with an increase of $178 billion in 2004 (see chart 2); and
  • An annual average of 57% feedback from 2004 through 2013, a $274 billion "cost" versus a "static" cost of $638 billion.

Chart 1

Chart 1

Chart 2

Chart 2

Dividends Drive Growth
The Center for Data Analysis (CDA) at The Heritage Foundation used a sophisticated reality-based scoring method to evaluate the President's plan. The projections show that ending the double taxation of dividends drives a significant percentage of the plan's growth, with the strongest growth coming in the first several years.

For the time period 2004-2013, the dividend plan alone contributes, on average:

  • 69 percent of the job growth (577,000);
  • 72 percent of the GDP growth ($50 billion);
  • 64 percent of the additional disposable income ($77 billion); and
  • Feedback of 60.4%; a $142 billion "cost" vs. a "static cost" of $360 billion.

These figures demonstrate the superiority of reality-based scoring, particularly when scoring a plan that so heavily relies on pro-growth calculations.

Ending the double taxation on dividends lowers the tax rate on capital, an important component of fundamental tax reform. As Treasury Secretary John Snow told the Associated Press, "Why do we want to double-tax the lifeblood of the economy - capital?"

A Wall Street Journal article [ subscription required] quotes Glen Hubbard, chief architect of the Bush administration's tax cut package, saying, "'Lowering the capital tax means that investors receive a much-larger after-tax return on investments.' ... That will urge them to invest more, pushing down the cost of capital so that businesses will invest more - and we'll all live happily ever after. 'A dividend tax cut is a way to raise wages.'"

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, and expands the tax base. This means that revenue projections based on static estimating models overestimate the actual revenue loss.

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