NCPA - National Center for Policy Analysis


October 19, 2007

If the Bush tax cuts expire as scheduled at the end of 2010, much of the newly acquired capital made possible by the tax cuts would no longer be sustainable.  We would see businesses disinvest -- investment would slump to allow the capital stock to shrink back to old-law levels through attrition, says Stephen J. Entin, president and executive director of the Institute for Research on the Economics of Taxation.


  • Killing the 15 percent tax rate caps on capital gains and dividends, the marginal rate cuts, the bracket widening for joint returns, and the partial estate tax relief currently in place, would jump the service price of capital by more than 10 percent.
  • The resulting stock of business plant, equipment, and inventories would ultimately be about 16 percent less compared to what it would be under current tax rates.
  • Hours worked would fall 2 percent; private-sector output and wage and capital income would drop 7 percent; that would mean an eventual 5 percent-6 percent reduction in gross domestic product (GDP).

We should rather be thinking of more rate cuts, says Entin.  Growth will slow even if the Bush cuts are simply extended, but we would keep the increase in the base level of GDP they made possible.  Letting the cuts expire would undo a fair bit of the capital formation since 2003, forestall gains yet to come, and shunt GDP to a lower baseline.  Hiking other taxes would only make matters worse.

Source: Stephen J. Entin, "Save the Bush Tax Cuts," Wall Street Journal, October 19, 2007.

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