NCPA - National Center for Policy Analysis

Waiting For a Tax Cut

May 12, 2003

Congress passed a tax cut in 2001, but all that most people have gotten is a lousy $300 tax rebate ($600 for couples). That's because the cut was phased in over five long years, with most of it not set to become effective until 2006.

  • Except for the immediate drop of the lowest marginal rate to 10 percent, the tax rate cuts were doled out over five years.
  • To get an idea of just how slow the phase-in is, consider that the top rate inched down immediately from 39.6 percent to 39.1 percent in 2001, then to 38.6 percent in 2002 -- but won't hit 35 percent until 2006.
  • Over two-thirds of the marginal rate cuts are not yet a reality.

Simply put, the economy has yet to receive an important pro-growth tax cut.

The current Bush proposal accelerates the original rate reductions, retroactively, to January 1, 2003, and eliminates the double taxation on dividend income. But Congress is trashing this good growth idea, says the Wall Street Journal:

  • On Friday, the House approved a bill to lower the top rate on dividends to 15 percent, but not eliminate it.
  • Under the bill passed last week by the Senate Finance Committee, individuals would get an exemption on the first $500 of the dividend tax, and a portion of dividends over $500 would receive a 10 percent exemption through 2007 and 20 percent after that.
  • To recoup this revenue, the Senate committee wants to raise taxes on Americans working abroad and on companies incorporating abroad.

The net "cost" of the Senate Finance tax package is $350 billion over 10 years in static revenue scoring, but a lot more than that in lost economic growth.

Source: Editorial, "What Tax Cut," Wall Street Journal, May 12, 2003.

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