Economic Impact Analysis of the Jobs and Tax Relief Reconciliation Act of 2003

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Economic Impact Analysis of the Jobs and Tax Relief Reconciliation Act of 2003

May 23, 2003 2 min read

Authors: Rea Hederman, Alfredo Goyburu and William Beach

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 reported below. 

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 percent[1]. These two measures will provide a needed boost to business investment.

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 million.
  • 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 billion. 
  • 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.


[1] Cohen, Darryl, Hassett, Kevin and Hansen, Dorthe-Pernille, "The Effects of Temporary Partial Expensing on Investment Incentives in the United States", National Tax Journal, Vol. LV, No. 3, September 2002.

Authors

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Rea Hederman

Executive Director, Economic Research Center

Alfredo Goyburu

Policy Analyst, Transportation and Infrastructure

William Beach

Senior Associate Fellow