NCPA - National Center for Policy Analysis

Economic Benefits Of A Tax Cut

September 13, 1999

The 10-year tax cut plan approved by the House and Senate carries an estimated federal revenue cost of $792 billion according to Congress' Joint Committee on Taxation. But Heritage Foundation analysts point out that this is a static forecast that does not take into account the growth enhancing economic effects of the tax cut.

  • Using the well-known WEFA economic model, their dynamic estimate of revenue loss is 86.5 percent of the static reduction in tax revenues over ten years, or $685 billion.
  • Thus the revenue loss would be less than 25 percent of the projected budget surplus over the next 10 years, leaving the entire Social Security payroll tax surplus and 27.5 percent of the surplus from other tax revenues.
  • Moreover, federal interest payments on the debt would fall from 12.1 percent of spending in FY 1999 to just 3 percent in FY 2009.

The tax cutting plan would have these positive revenue effects because of its economic benefits. Specifically, the tax cut would:

  • Increase the rate of economic growth from 2.5 percent to 2.7 percent, in Fiscal Year (FY) 2005, and by an average of 0.1 percentage points per year over the 10-year period.
  • Increase the average family of four's disposable personal income by $2,800 in FY 2008, in 1992 inflation-adjusted dollars.
  • Families would respond by increasing their spending by $1,858 per family, and by increasing household or personal savings by $890.
  • And there would be 1.163 million more jobs, reducing the unemployment rate by 0.1 percentage points to 5.4 percent.

The Heritage researchers note that the higher growth and employment rates from the tax cut would actually increase the Social Security surplus, rather than reduce it.

Source: D. Mark Wilson, et al., "How Congress's Tax Bill Would Affect Families, the Economy, and the Federal Budget," CDA Report No. 99-6, September 13, 1999, Heritage Center for Data Analysis, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.


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