April 16, 2004 | WebMemo on Taxes
Senator John F. Kerry, the presumptive presidential nominee of the Democratic Party, has proposed a number of changes to U.S. tax policy that he argues will boost the economy's performance and increase jobs. However, an econometric analysis of his plan shows that the negative effects of an increase in taxes for high-income taxpayers overwhelm the positive effects of making key elements of the Bush tax plan permanent for taxpayers with incomes under $200,000. The net effect is a slower economy and job creation significantly below potential.
Our preliminary analysis estimates the effects of the Kerry tax plan using a standard macroeconomic model of the U.S. economy. This analysis shows that:
The Kerry Tax Plan
Senator Kerry mixes tax cuts with tax increases in his proposed tax plan. Though many details remain to be announced by the Senator's tax team, the following appear to be principal, well-developed elements of his plan and were incorporated in our economic analysis of his proposals:
The net effect of these tax policy changes-not counting the negative economic feedback they would cause-is a net tax increase of $609 billion over the ten-year period beginning January 1, 2005.
While these economic estimates are likely to change as Senator Kerry announces more details about his tax plan, they strongly indicate the weakness of his current approach. Raising taxes on high-income taxpayers to cover budget shortfalls may make political sense, but it is not the right move to encourage economic growth. Senator Kerry's new tax revenues divert capital from better economic uses, which slows the growth in productivity that usually stems from new investment. Job and income growth suffer as a consequence.
What Senator Kerry should do is embrace the goal of faster economic growth and endorse the objective of making every one of the 2001 and 2003 tax cuts permanent. The Senator is halfway toward this objective now with his proposal to secure the middle-class tax cuts. However, the Senator is missing an opportunity to transcend the politics of economic policy with a vision for a real pro-growth tax policy. Taking the next step and making all of the 2001 and 2003 tax cuts permanent may be politically difficult, but it would be a sensible step for any candidate concerned about economic growth.
Beach is Director of the Center for Data Analysis at The Heritage
Analysts in the Center for Data Analysis used the baseline forecast and the U.S. Macroeconomic Model of Global Insight, Inc., to simulate the economic effects of adopting Senator Kerry's tax proposals. The methodologies, assumptions, conclusions, and opinions in this report are entirely the work of Heritage Foundation analysts. They have not been endorsed by and do not necessarily reflect the views of the owners of the model.
 Every effort has been made to estimate the fiscal and economic effects of Senator Kerry's tax proposals. However, these proposals are being constructed in the midst of a political campaign, and key details of proposed policy changes frequently suffer in the heat of political battle. Thus, all of the estimates reported in this essay are to be viewed as preliminary. The Center will publish again on Senator Kerry's tax plan when more details are available.
 Analysts in the Center for Data Analysis used the Center's Individual Income Tax Model to produce estimates of changes to the individual income tax for taxpayers with incomes of $200,000 or more. Estimates of revenue changes resulting from the Kerry health tax credits come from materials supplied by the Kerry campaign. Additional estimates of tax policy changes were taken from official scoring documents of the Joint Committee on Taxation.