The Economic Effects of the Dole Tax Plan

Studies | Taxes

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

Effects on the Economy

Table I - Effects of the Dole Tax Plan on Production Sectors

The announced goals of the Dole plan are to increase the rate of economic growth and to increase disposable incomes by reducing the amount going to taxes. The tax cuts and child tax credit proposed by Dole would result in expanded output in every sector of the economy except subsidized agricultural crops. A large increase in disposable income - discussed later in this paper - would increase consumption of every type, which in turn would stimulate the demand for producer goods and services.

Effects on Production. The demand for producer goods and services created by increased consumption would be reflected most strongly in the increased production of food and tobacco (up 3.7 percent), as shown in Table I. In addition:

  • Financial services and other production services would grow 3.5 percent and 3.1 percent, respectively, because of the demand created by the growth in other production sectors.
  • The output of livestock would grow by 2.9 percent to accommodate the increase in food consumption.
  • Crude oil and natural gas production would grow by 2.8 percent (and be accompanied by a decrease in oil imports) due to increased exploration resulting from the lowering of the capital gains tax rate.

The expansion of the production sectors is generally accompanied by an increase in the net import of producer goods, with three exceptions. This general increase in net imports is not surprising, given the structure of the tax cuts. The Dole tax plan reduces income taxes, but not business taxes. This encourages households to increase consumption, which in turn encourages producers to produce more goods and services. However, producers do not increase output as much as if business taxes were also decreased, so net imports increase.

"The large increase in domestic production of crude oil and natural gas is accoppanied by a decrease of 2.3 percent in net imports of goods."

However, there are three exceptions: 1) goods from foreign manufacturing, 2) foreign crude oil and natural gas and 3) foreign refined petroleum and associated products. Net imports of manufactured goods decrease by 0.03 percent, so the "giant sucking sound" that concerned Ross Perot during the debate over the North American Free Trade agreement is not apparent. More significantly, dependence on foreign oil goes down. The large increase in domestic production of crude oil and natural gas pointed out above is accompanied by a decrease of 2.3 percent in net imports of goods produced in this sector by foreign producers. Similarly, the net imports of goods from the foreign refining sectors (refined oil, kerosene, distillates and residual fuel oil ) decrease by 1.4 percent. These goods are typically imported from Canada and Mexico because they are more volatile than crude oil and are not usually imported from overseas sources.3

The decrease in production of subsidized crops (also referred to as "program crops") is explained by the fact that land is needed for livestock and non-subsidized crops (vegetables, fruits, and nuts). As the demand and, more importantly, prices for these other agricultural products increase, farmers are less dependent on subsidies they could receive for subsidized crops.4

Table II - Effects of the Dole Tax Plan on Consumption Sectors

Effects on Consumption. Every consumer sector of the economy would receive a strong boost from the Dole plan. As Table II shows, increases in output would range from 3.0 percent to 5.3 percent, except for savings, which would increase by 7.9 percent. Other than savings:

  • The largest expansions would be in gasolines and fuels (5.3 percent), transportation (5.3 percent), furnishings and appliances (5.2 percent) and reading and recreation (5.2 percent).
  • The smallest increases would be in consumer financial services (3.0 percent) and housing (4.0 percent), in both instances because so much of the available capital would go to production sectors.

Effects on Savings. One of the important effects of the Dole plan would be the large increase in savings (7.9 percent). There are two major reasons for this. First, savings includes purchases of stocks and bonds and the reduction of the capital gains tax rates encourages these. Second, as discussed below, disposable income would increase among all income groups, and as incomes increase households save more. The increase in savings bodes well for future economic growth.5

Effects on Job Creation. The increased output resulting from implementation of the Dole plan would cause private-sector employment to grow by 2.8 percent, or 2.9 million full-time jobs. As Table III shows, services other than financial services, which now employ about two-thirds of the private-sector work force, would create about three-fourths of the new jobs, with that sector's workforce growing by 3.1 percent.

Table III - Increase in Employment Due to the Dole Tax Plan

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