NCPA - National Center for Policy Analysis

Bush Tax Cut Boosted Economy

February 20, 2003

Proponents of President Bush's tax cut in 2001 argued that it would increase economic activity by stimulating investment and productivity. Opponents argued that it was just another giveaway program to the rich.

However, researchers say the tax cuts have affected the net national saving rate -- the share of net output that is consumed by neither government nor households. Among their findings:

  • The Bush tax cut may increase savings in the short run, boosting investment and productivity.
  • The cuts will have additional beneficial effects on labor supply by encouraging people to work more and for those with higher incomes to save more.

These dynamic feedback effects are significant:

  • They offset as much as 10 percent to 40 percent of the revenue losses according to static calculations.
  • However, in the long run saving and output are likely to fall unless Congress reacts to the revenue losses generated by the tax cut by reducing government consumption spending.

If Congress hikes taxes to cover federal deficits generated by tax cuts and continually rising spending, there will be a long-run drag on the economy.

Source: David R. Francis, "Effects of the Tax Cut on Saving," The NBER Digest, December 2002; based on: Alan Auerbach, "The Bush Tax Cut and National Saving," National Bureau of Economic Research, Working Paper No. 9012, June 2002.

For NBER Digest article

http://www.nber.org/digest/dec02/w9012.html

For abstract

http://papers.nber.org/papers/w9012

 

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