May 19, 2003 | WebMemo on Taxes
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:
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
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, 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:
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:
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.