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

Effects on Government Revenues

Critics of the Dole plan, led by President Clinton, have maintained that it would "blow a hole in the deficit," a phrase they have used frequently. Supporters of the plan have contended that new tax revenue generated by the resulting economic growth - the "feedback" effect - would reduce the net amount of revenue lost to the tax cuts.

It has been estimated that the Kennedy administration tax cut in the early 1960s had a feedback of between 25 percent and 75 percent; that is, federal revenues were reduced by $12 billion, but between $3 billion and $9 billion of the direct cost was recovered after two years through increased economic growth.6 Lawrence Lindsey, formerly a professor at Harvard University and now a member of the Board of Governors of the Federal Reserve System, calculated that the Reagan administration tax cut in the 1980s had a feedback of 70 percent by 1985.7 The Congressional Budget Office estimated in 1978 that a one-third reduction in income tax rates at that time would produce 24 percent feedback the first year.8

The model finds that the Dole tax plan would result in a revenue loss of 6.2 percent before consideration of new revenue from economic growth, but that when the revenue from growth is considered, the revenue loss would be 4.0 percent - a feedback of 35.5 percent in the first year.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.

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