The Economic Effects of the Dole Tax Plan

Policy Reports | Taxes

No. 207
Tuesday, October 01, 1996
by Roy G. Boyd and Barry J. Seldon

Executive Summary

Republican presidential candidate Bob Dole has proposed a tax plan that includes an across-the-board reduction of personal income tax rates of 15 percent, a reduction in the capital gains tax rate and a child tax credit of up to $500. The announced goals of the Dole plan are to increase the nation's economic growth rate and to provide taxpayers with more disposable income.

This study examines the economic effects of the Dole plan using a computable general equilibrium (CGE) model, an economic model that has been published in several peer-reviewed journals. The model finds that:

  • The plan would result in an increase in real output in every sector of the economy except government-subsidized agricultural crops.
  • The greatest growth would be in consumer sectors, which would generally increase from 3 percent to 5 percent.
  • The tax cuts would stimulate savings and investment, with a 7.8 percent increase in savings.
  • The plan would create 2.9 million new full-time jobs.

Taxpayers would receive a direct gain from a tax cut, but even those paying little or no taxes would benefit.

  • People with disposable incomes of less than $13,000 a year would average a gain of 3.8 percent.
  • The smallest gain, 2.9 percent, would go to people with disposable incomes between $25,800 and $38,600 a year.
  • Those with disposable incomes of $64,500 or more would average a gain of 7.0 percent.

The model finds that under the Dole tax plan, new tax revenue resulting from the additional economic growth - the "feedback" effect - would restore 35.5 percent of the revenue loss from the tax cuts in the first year. As a result, the revenue loss of 6.2 percent from the tax cuts would be reduced to 4.0 percent. This is in line with the estimated feedback from the Kennedy administration tax cut in the early 1960s and the Reagan administration tax cut in the 1980s.

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