NCPA - National Center for Policy Analysis

Not So Good Tax Cuts

November 14, 2001

Not all tax cuts are good, says the NCPA's Bruce Bartlett. Some tax cuts can damage the economy by distorting investment and production decisions. And among good tax cuts, some are better than others.

  • For instance, cutting marginal tax rates -- the tax applied to each additional dollar earned -- is good because it increases incentives to work, save or invest.
  • Moreover, marginal tax rate cuts are always forward-looking, because they affect only incremental economic activity.
  • On the other hand, tax credits and rebates have little or no incentive effects for growth or consumption.
  • Also, they can morph into spending programs -- such as the current economic stimulus plan to send a "tax rebate" to individuals who paid none -- when the link between tax cuts and tax liabilities is severed.

And tax rebates can be extended to corporations as well as individuals. Thus House Republicans passed an economic stimulus bill that includes rebates to corporations for past payments of the Alternative Minimum Tax (AMT).

While there is a very strong case for abolishing the corporate AMT, there is not the slightest evidence that sending rebate checks to corporations will do any more to stimulate growth than sending rebates to individuals.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, November 14, 2001.


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