The Economic Effects of the Dole Tax Plan

Studies | Taxes

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


Introduction

Republican presidential candidate Bob Dole has proposed a tax plan with three major components.

  • All individual income tax rates would be reduced by 15 percent; thus, a current 15 percent rate would be reduced to 12.75 percent and a current 28 percent rate to 23.8 percent.
  • Capital gains taxes would be reduced from 28 percent to 14 percent for taxpayers earning more than $40,100 and from 15 percent to 10.5 percent for taxpayers earning less than $40,100.
  • Tax credits would be allowed for children under 18 - a maximum of $500 for single heads of households earning incomes up to $75,000, for married individuals filing separate returns with incomes up to $55,000 and for married couples filing joint returns with household incomes up to $110,000. (The credit would be reduced by $25 for every $1,000 of additional income for all three types of households.)

There are other components in the Dole tax plan, but the economic effects are minor and are not taken into consideration in this study.

In recent years, economists have developed a way of calculating the consequences of the complex economic interactions caused by changes in the tax code. The method makes use of a computable general equilibrium (CGE) model.1 Although different scholars use different variations of this model, the core concept is well understood and has appeared many times in the economic literature.2

"An economic model is used to calculate the effects of the Dole tax proposal."

In this paper, we describe the results of our use of a CGE model to calculate the effects of the Dole proposals on the various sectors of the economy, changes in the income of different income groups and the effect on government revenues.

Our model, which is described in more detail in the appendix, divides the economy into 14 production sectors and 14 consumption sectors. The goods and services consumers buy come from combinations of output from various primary production sectors. For example, the sale of food products to consumers requires outputs from the subsidized crop, other crop, livestock and food processing sectors integrated with outputs from the services sector such as advertising and distribution. The model compares relative prices and quantities of the output of the various production and consumption sectors before and after the implementation of the changes proposed by Dole to see how they change and how the changes interact to cause other changes. In turn, these changes affect the economic welfare of the various income groups, which affects government revenue.


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