Increasing Growth Is The Reason To Cut Taxes
December 8, 1999
Governor George W. Bush erred in not attributing a higher rate of economic growth to his tax plan. He has thereby denied himself an important argument for why we need a tax cut, and opened himself up to unnecessary criticism about its size and impact on the budget.
In his proposal, Gov. Bush says that the baseline economic assumption used is 2.7 percent growth in real gross domestic product over the next five years. This is odd because the U.S. economy has been growing at a 3.6 percent rate since 1992 -- thus it appears as if Gov. Bush's plan is actually going to cause a drop in economic growth.
Gov. Bush's modest growth estimate is actually a bit higher than the 2.5 percent rate estimated by the Congressional Budget Office. However, the CBO is notorious for underestimating growth. In January, CBO predicted 2.3 percent real growth this year. Economists now think that number will be closer to 3.8 percent.
- Assuming no change in growth from a tax cut or tax increase creates a bias against tax cuts and in favor of tax increases.
- Politicians using static revenue estimates deny themselves the main argument in favor of tax cuts; namely, that they will raise growth, lower unemployment and increase family incomes.
Bush's approach is all the more strange given that former Senator Bob Dole used dynamic scoring for his 15 percent tax rate reduction in 1996, and many of his economic advisers are also Bush's advisers. Indeed, even liberal economists, such as Lawrence Chimerine of the Economic Strategy Institute, concede that tax cuts like Bush's will only lose 65 cents for every $1 of gross revenue loss.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 8, 1999.
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