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WebMemo #277 on Taxes

May 19, 2003

How the House and Senate Can Produce the Most Pro-Growth Tax Bill

By and

Final Tax Cut Package Should Include the Most Pro-Growth Provisions
The House and Senate leadership currently has before it three options for cutting taxes and advancing economic growth: the tax legislation recently passed in the House (H.R. 2) and the Senate (S. 1054) and President George Bush's economic plan. To maximize the pro-growth aspects of the three tax plans, the conference committee should:

  • Adopt the President's plan for eliminating the double taxation of dividends;
  • Adopt the President's plan for accelerating the currently scheduled decreases in individual marginal tax rates;
  • Expand bonus depreciation as indicated in the House plan; and
  • Include the small business expensing provision.

Economic growth occurs when people work more, save more, and invest more to boost national income and wealth. Businesses grow when they have lower costs that allow projects with marginal profitability to become profitable. With the amount for tax relief already arbitrarily capped at $550 billion over 10 years by the budget agreement, Congress should focus on tax proposals that create the most economic growth within this arbitrary static price.

What the Conference Bill Should Include
If the House and Senate agree to reconcile their differences through a conference, that conference committee should reduce the tax on dividends and accelerate the marginal rate provisions of 2001, as these are the two best elements of the tax cut. They cause the most job growth and return the best value for their cost. By not phasing out these provisions, the President's plan creates the sense of certainty and stability needed to ensure the maximum economic bang for the buck.

Congress also should expand bonus depreciation and include the small-business expensing provision. The provisions cause strong growth in the early years by temporarily reducing business costs. Business investment has declined significantly over the past two years,[1] and the bonus depreciation and the small-business expensing provision encourage businesses to expand. These provisions reduce the cost of capital by up to 5 percent, which is comfortably above the accepted threshold that economists say will encourage new investment and economic growth.

Congress should also ensure that taxpayers who benefit from the tax legislation it sends to President Bush are protected against triggering or increasing their tax liabilities under the alternative minimum tax (AMT). If the ultimate tax legislation expands AMT liabilities, the positive aspects of this year's tax relief provisions may inadvertently be undone.

Eliminate Negative Growth Aspects
Additionally, the following provisions should be scratched from any bill coming out of the conference committee:

  • Aid to state and city governments,
  • Child care tax credit,
  • Special tax breaks included in Senate bill, and
  • Any attempt to increase tax collections on taxpayers working in foreign countries.

Effects of Best Growth Plan
If Congress sends President Bush a tax bill that contains the best pro-growth provisions of the three competing plans, the real beneficiaries will be the millions of Americans actively engaged in working, investing, and building businesses. Analysts in the Center for Data Analysis of The Heritage Foundation project that these pro-growth tax changes would:

  • Create 817,000 jobs in 2004 and an average of 675,800 jobs from 2004-2008;
  • Increase GDP by $66.1 billion and an average of $58.7 billion from 2004-2008 (inflation- adjusted 1996 dollars);
  • Increase personal disposable income by $148.4 billion in 2004 and an average of $122.2 billion from 2004-2008;
  • Create a total tax savings for taxpayers of $556 billion, or $6 billion over the budget agreement, which can be met by spending reductions; and
  • Cause the real cost to the government to be even less as increased economic growth produces new tax revenues.


[1]Global Insight, Inc., May 2003 U.S. Macroeconomic Baseline Scenario Forecast (for the period 2003, second quarter, through 2013, fourth quarter), May 5, 2003. These data are available upon request from the authors. Business investment has fallen from 14.2 percent of gross domestic product (GDP) in early 2001 to 12.3 percent earlier this year, while consumption's share of GDP is at an all-time high of 69.7 percent.

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