Economic Benefits of Bush Tax Cut Plan
May 8, 2003
The revenue loss from the president's tax plan is likely to be much less than conventional analysis suggests, says former Council of Economic Advisers Chairman R. Glenn Hubbard, of Columbia University. The CEA's analysis, for example, emphasized demand-side effects on consumer spending and investment in the near term.
- Using a conventional forecasting model, the Council of Economic Advisers projected the president's entire proposal would raise real gross domestic product (GDP) by about $670 billion over the next five years.
- This increase in output would raise federal revenues by $133 billion over that period.
But that analysis omits the long-run supply-side benefits -- of which the dividend tax reduction would be strongest. Ending the double tax raises long-term income by increasing capital formation and improving the use of existing capital.
- Directly, the dividend tax cut significantly reduces the cost of financing new investments, adding about a quarter of a percentage point to real GDP every year.
- Indirectly, putting the existing capital stock to better use by eliminating the double tax would add about another quarter of a percentage point to GDP annually, according to projections in a 1992 Treasury Report.
Putting these two effects together, the proposal to eliminate the double tax would increase the long-run level of real GDP by about 0.5 percent per year between 2008 and 2013, amounting to $360 billion in extra output and about $85 billion of extra revenue.
Coupled with the short-term effects, the dividend plan clearly has significantly lower revenue costs than those figuring in the current debate.
Source: R. Glenn Hubbard, "Analysis Deficit," Wall Street Journal, May 8, 2003.
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