A Tale of Two Tax Plans


A Tale of Two Tax Plans

Apr 3, 2003 3 min read

Senior Associate Fellow

With bombs falling in Iraq and the prospect of deficits exploding back home, it's no surprise some lawmakers are getting cold feet at the thought of passing a large tax cut like the one envisioned by President Bush. We need something smaller and safer, they say. Something like … well, like the one proposed by Senate Minority Leader Thomas Daschle.

There's no question that those looking for a quick fix won't be disappointed -- the Daschle plan would give the economy a modest boost this year. But for those who want long-term and short-term growth -- lots of new jobs and a high-performing economy, this year and beyond -- it's no contest: The Bush plan wins, hands down. We know because we've run the numbers.

The Daschle plan, which relies on one-year tax cuts targeted to certain income groups and small businesses, plus large increases in federal spending, will give gross domestic product (GDP) a bigger boost in the first year. But after that, the Bush plan creates more GDP growth and significantly outperforms the Daschle plan in every other measure.

The Daschle plan would cause GDP to grow by $49 billion this year, versus only $29.5 billion under the president's proposal. But even in the first year, the president's proposal creates more jobs -- 843,000 to 545,000 -- than the Daschle plan does. And the differences only become more dramatic after that.

The Bush plan would create an average of 787,000 jobs every year through 2013, according to our analysis. The Daschle plan provides for modest job growth next year and little, if any, beyond that. Same with economic growth. The Bush plan would give us an average of $69 billion extra in GDP every year through 2013. With the Daschle plan, we'd get about $15 billion next year and little, if any, each year after that through 2013.

The Bush plan would take a serious whack at unemployment, cutting the rate from 5.3 percent this year to 4.8 percent next year and about 4.6 percent to 4.7 percent each year after that through 2008. The Daschle plan would shave a half-percent off the unemployment rate this year but leave it unchanged, at about 5.3 percent, through 2013.

When it comes to encouraging business investment, Sen. Daschle's plan would serve mainly to prove conservatives' point about tax policy. When he provides a cut in taxes on business investment in 2003, investment in factories, equipment and other non-residential products increases by $7.3 billion. The next year, when he takes away the tax cut, the increase in business investment dries up with it.

Meanwhile, President Bush's plan -- which calls for permanent cuts that would be larger and directed to businesses of all sizes -- would produce $10.9 billion more in business investment this year and a total of $581.6 billion more through 2013.

But Sen. Daschle's plan does not place a lot of stock in tax cuts for economic stimulus anyway. It relies instead on the failed formula of attempting to have government spend its way out of economic doldrums. His plan calls for sending $71 billion in federal funds to taxpayers in the form of advance refunds on tax payments during the third quarter of this year and for sending states $26 billion in subsidies, most in direct aid or support for Medicaid payments, to address their budget shortfalls.

At best, this moves money around but does nothing to create growth. At worst, it adds to the deficit problems of the states -- leading, eventually to even higher taxes.

Conversely, President Bush pushes for growth that works -- and lasts. He wants to speed up the tax cuts that don't take effect until next year or, in some cases, 2006, so Americans can enjoy their benefits now. He wants to put more Americans in the 10 percent tax bracket, provide marriage penalty relief now and increase the child tax credit. He also wants to end the double-taxation of dividends, to help Americans more fully share in the benefits of the stock market.

Our estimates show that the Bush proposal would cut government revenues by $31.4 billion this year and another $638.4 billion over the next 10 years. And where does that money go? To those who invest in America, create jobs and provide economic vitality for all.

Which is why, in the end, it's truly no contest.

-William Beach is the director of Center for Data Analysis at The Heritage Foundation, a Washington-based public policy research institute.

Distributed nationally on the Knight-Ridder Tribune wire