NCPA - National Center for Policy Analysis

Tax Cuts Would Provide Short-And-Long-Term Economic Stimulus

April 7, 2003

The U.S. Senate wants to President Bush's proposed tax cut package in half, but economists say that would be a mistake. Eliminating the double taxation of corporate dividends -- first as corporate profits, then as income to investors -- would provide an immediate and long-term stimulus, say economists Arthur Laffer and Stephen Moore.

  • Eliminating double taxation of dividends would increase the static after-tax cash flow of the Standard & Poor's 500 companies by more than 15 percent -- and it would have an immediate effect on stock prices.
  • Accelerating already legislated tax cuts would reduce the incentive to defer income and increase incentives to increase work output.
  • In 1993, the U.S. national debt was 49 percent of gross domestic product -- the highest level in 37 years -- but because of the reduction in capital gains tax rates during the Clinton administration, the reduction in federal spending as a share of gross domestic product, and budget surpluses, the United States has budgetary flexibility.

Laffer and Moore say the prospect of budget deficits should not deter tax cuts. In order for the national debt to return to its 1993 level as a share of GDP, assuming a 5 percent annual growth rate before adjusting for inflation, we would have to run deficits of $500 billion per year for the next 10 years. That is unlikely, especially if spending is restrained, and taxes are cut. As with the Kennedy, Reagan and Clinton-era tax cuts, the rate of real economic growth is likely to increase, and rising federal revenues will reduce the size of the deficit from the levels forecast by static projections.

Source: Arthur B. Laffer And Stephen Moore, "A Tax Cut: The Perfect Wartime Boost," Wall Street Journal, April 7, 2003.

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