NCPA - National Center for Policy Analysis


October 14, 2004

Ed Prescott, co-winner of this year's Nobel Memorial Prize for economics, says tax cuts should be reduced even further in order to give individuals more incentive to work and entrepreneurs more incentive to invest.

Prescott, an expert on the business cycle, argues that Bush's tax cuts were too small to reenergize the U.S. economy. In aggregate, the three tax cuts under Bush total about 2 percent of gross domestic product (GDP) -- or about the same as President Kennedy's tax cut in 1964.

Even with Bush's tax cuts, the U.S economy is about 4 percent below its potential, in large part due to the stock market crash in 2000. Prescott adds that:

  • The European Union's 9 percent unemployment rate demonstrates the problems stemming from high taxes; in contrast, the rate is 5.4 percent in America.
  • Bill Clinton's tax hike in 1993 depressed total output nearly 4 percent below what would have been the case without higher taxes.

Ultimately, Prescott suggests that policymakers should strive to further reduce taxes instead of raising them as advocated by Senator John Kerry (D-MA).

Source: Editorial, "Bigger Means Better," Investor's Business Daily, October 13, 2004.


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