NCPA - National Center for Policy Analysis

It's Marginal Tax Rates That Matter

March 27, 2001

To many politicians, stimulating the economy with tax cuts means the same as increasing government spending: getting money into the hands of people who will immediately consume it in order to increase demand for goods and services. But another kind of tax stimulus aims to increase the economic growth rate by increasing incentives to save and invest.

The Bush tax cut does the latter by reducing marginal tax rates. Unfortunately, as economic Alan Reynolds of the Hudson Institute points out, that's not the part of the Bush tax cuts Congress is talking about accelerating.

The one part of the Bush plan that could really improve economic incentives -- lower income-tax rates -- has been scheduled to be phased in at a glacial pace.

  • A full $1.3 trillion of that $1.6 trillion, or 81 percent, was supposed to be delayed until after the year 2006.
  • Tax rates of 28 percent to 39.6 percent would inch down by no more than one percentage point each year until 2006, when they would at last be 25 percent to 33 percent.
  • Even then, the top tax rate of 33 percent would still be higher than it was before 1993.

Only 31 percent of the $1.6 trillion tax cuts (little more than $500 billion) is allocated toward cutting the top four tax rates, while the rest is a hodgepodge of measures of little or no economic significance.

To trim tax rates to 25 percent to 33 percent immediately, retroactive to January, would cost only $45 billion before including the growth enhancing effects of lower tax rates. Lowering the lowest tax rate from 15 percent to 10 percent retroactively would cost 62 percent as much, and give every taxpayer 50 bucks this year, but leave punishing marginal rates in place.

Source: Alan Reynolds (Hudson Institute), "Fighting Off Recession," New York Post, March 22,2001.


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