The Jobs and Growth Tax Relief Reconciliation Act of 2003 that
the House and Senate passed on May 23 contains some strong
pro-growth elements, specifically accelerating the 2001 marginal
rate cuts, lowering the taxation of dividends and capital gains and
allowing businesses to accelerate depreciation deductions on their
investments. Our analysis shows that these three elements are
principally responsible for the increase in economic growth
Bonus depreciation and the reduction of tax rates on dividends
and capital gains will help businesses expand and grow more
quickly. This is because the cost of capital will drop and business
managers will be able to generate a higher return on their
investments. Managers will increase investments if they need fewer
funds to pay for a new project. Economists estimate that bonus
depreciation would reduce the cost of capital by about four
These two measures will provide a needed boost to business
Marginal rate cuts provide economic growth by boosting a
taxpayer's propensity to work more, save more and invest more.
Because a taxpayer gets to keep more of their earnings, taxpayers
will expand their economic output to maximize their income. Quite
simply, as the tax on work decreases taxpayers have a greater
incentive to work.
Economists at the Center for Data Analysis (CDA) introduced the
tax policy changes contained in the Jobs and Growth Tax Relief
Reconciliation Act of 2003 (H.R. 2) into a model of the U.S.
economy that is widely used by Fortune 500 companies and government
agencies. This model produced the following estimates of how H.R. 2
would likely affect economic performance between 2003 and 2013.
- Economy produces more goods and services: In 2004 the
CDA analysis shows that the nation's production of goods and
services (Gross Domestic Product after inflation) will likely be
$73.4 billion higher than without the tax changes contained in H.
R. 2. Indeed, the growth rate of GDP will jump from 3.3 percent to
3.9 percent for 2004. Between 2004 and 2008, the average gain in
GDP will be $34.7 billion. During the second five years of the
budget period, the average increase in GDP drops to $8.2 billion as
the major provisions of H.R.2 expire.
- Over 800,000 new jobs in 2004: The pro-growth components
of H.R.2 will likely lead private and public sector employers to
boost their payrolls significantly. In 2003, the CDA analysis
indicates that employment will increase by 383,000 jobs; in 2004 by
850,000 jobs; and in 2005 by 477,000 jobs. The average employment
increase over the first five-year period (2004 through 2008) is
412,000. The average over the next five years (2009 through 2013)
is expected to be 57,000.
- Unemployment rate drops: Unemployed Americans are
significant beneficiaries of Congress's tax legislation. The number
of unemployed workers is expected to drop by 737,000 in 2004 and by
416,000 in 2005. Between 2003 and 2005, the CDA analysis indicates
that the number of unemployed workers will fall by over 1
- Personal savings rate jumps: The CDA estimates that
personal savings could increase by $135.2 billion in 2004 (after
inflation). That increase means that the personal savings rate
would jump from a forecasted 2.9 percent without H.R. 2 to 4.6
percent. The personal savings rate for 2005 also is significantly
stronger than it otherwise would be: 2.6 percent rate compared to
1.5 percent without the tax legislation.
- Investment increases significantly: The pro-growth
elements of the Jobs and Growth Act, particularly the dramatic
reduction in the tax rate on dividends and capital gains, leads to
a pronounced increase in non-residential investment. In 2004,
inflation-adjusted non-residential investment increases by $35.8
billion, followed by an increase in 2005 of $25.5
- Trust fund revenues grow: One beneficiary of H.R. 2 are
the federal trust funds, principally the Social Security and
Medicare trust funds. Due to the increased number of Americans
working and the increase in payroll taxes paid, revenues for the
trust funds will increase by $26.2 billion more than had Congress
not passed this legislation.