Fiscal And Economic Effects Of A 10 Percent Tax Cut
March 4, 1999
What effects would a uniform 10 percent rate reduction in marginal tax rates for individuals have on federal revenues and the economy?
Using computer models, analysts with the Heritage Foundation's Center for Data Analysis (CDA) simulated the rate reduction to estimate changes in individual income tax collections. They also estimated the likely economic effects and the "dynamic" budgetary effects of the tax law change.
Among their findings:
- Under static assumptions, cutting tax rates by 10 percent reduces federal revenues from the individual income tax by $797 billion over an 11-year period, 1999 through 2009.
- However, a dynamic simulation shows that federal revenues decline by $633 billion over this same period, implying a revenue feedback from the economy of 21 percent.
- Under static assumptions, this leaves $1.768 trillion of the Congressional Budget Office's forecasted surpluses from FY 2000 through FY 2009 available for Social Security reform and other purposes.
- This amount equals 69 percent of the consolidated or unified budget surplus, or significantly more than the percentage that President Clinton and the congressional leadership agree should be devoted to Social Security reform.
Almost all taxpayers would enjoy a lower tax bill, with the exception of individuals who pay the Alternative Minimum Tax. In 1999, the average tax reduction would be about $700 for taxpayers in the 15 percent bracket and over $1,050 for those in the 28 percent bracket.
The economy would also benefit, with gross domestic product rising by an average of $35.9 billion per year after inflation between FY 2000 and FY 2009. Total civilian employment would rise an average of 289,000 per year, personal savings would increase $39.4 billion and the personal savings rate would rise from 4.7 percent to 4.9 percent.
Source: William W. Beach, D. Mark Wilson, Ralph A. Rector, Rea S. Hederman and Aaron B. Schavey, "The Economic and Revenue Effects of Reducing Federal Income Tax Rates by 10 Percent," Report No. 99-02, March 4, 1999, Heritage Center for Data Analysis, 214 Massachusetts Avenue N.E., Washington, D.C. 20002, (202) 546- 4400.
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