Bush Administration Tax Policy

Research Report

Bush Administration Tax Policy

Effects on Long-Term Growth
October 18, 2004

Abstract

Tax policy can raise growth in the long run increasing the level and improving the allocation of labor and capital inputs. The net effect of the recent tax cuts on growth is theoretically uncertain and is the net effect of (a) the generally positive effects induced by lower marginal tax rates, (b) the negative effects induced by higher budget deficits. Several studies have quantified the various effects noted above in different ways and used different models, yet all have come to the same conclusion: Making the tax cuts permanent is likely to reduce, not increase, national income in the long term unless the reduction in revenues is matched by an equal reduction in unproductive government consumption expenditures. Even in that case, a positive impact on long-term growth occurs only if the spending cuts occur contemporaneously, which has decidedly not occurred, or if models with implausible features are employed.

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