The Heritage Foundation

WebMemo #237 on Taxes

March 25, 2003

March 25, 2003 | WebMemo on Taxes

What the CBO Director Really Said

Congressional Budget Office (CBO) Director Douglas Holtz-Eakin affirmed Tuesday that the growth components of President Bush's budget are integral to the results of the CBO scoring of the entire budget.

CBO analysis -- delivered during testimony before the House Budget Committee -- shows that the type of tax reductions found in the President's Economic Growth package work to offset the drag on the economy from increased spending. (Figure 2: Various Models' Estimates of the Deficit Under the President' s Budgetary Proposals - pdf.)

The President' s tax cut policies spur greater economic activity through enhanced incentives to work and invest. These enhancements largely offset the drag on economic growth caused by the way increased government and household spending competes for available funds, thus crowding out investment and forcing up interest rates.

CBO estimated the economic effects of all the spending and revenue changes in the President' s budget. Unfortunately, the CBO did not publish their estimates of how individual elements of the President' s budget are likely to affect the economy, even though such estimates must support the conclusions described in the CBO' s report. The Heritage Foundation, however, has analyzed the set of tax proposals known as the Economic Growth Package, which is an integral part of the President' s overall budget.

Heritage found that the President's Economic Growth plan would 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 that 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;
  • 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; and
  • An annual average of 57% feedback from 2004 through 2013, a $274 billion "cost" versus a "static" cost of $638 billion.

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. The CBO also found that the elimination of the taxation of dividends would reduce the tax on capital and increase GDP over the next ten years.1 Had the CBO separately estimated the components of the budget proposals they would have shown that growth proposals produce stimulative economic effects.

Incidentally, while indicating that plans such as the President's economic growth plan is the biggest engine of growth among the budget proposals, CBO's scoring indicates that proposals similar to the President's Prescription drug plan have the largest drag on the economy ($400 billion in increased consumption). According to CBO, "policies that increase demand by raising government or private consumption tend to lower output in the long run because they tend to eventually decrease investment and the size of capital stock."2


[1] See the explanation on the double taxation of dividends in Box Four of, An Analysis of the President' s Budgetary Proposals for Fiscal Year 2004, Congressional Budget Office.

[2] Ibid, page 26.

 

About the Author

Ralph A. Rector, Ph.D. Senior Research Fellow
Center for Data Analysis

Rea S. Hederman, Jr. Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis