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![handle is hein.taxfoundation/iretcgadv0140 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION
IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing
the public about policies thait will promote growth and efficient operation of the market economy.
December 10, 2002
Advisory No. 143
STIMULUS OR INCENTIVES?
WHAT WOULD GOOD TAX RELIEF LOOK LIKE?
The White House is working on a new set of
tax proposals to spur the economic recovery. A
number of ideas are being mentioned in the press,
including moving forward scheduled marginal rate
cuts, relief from the double taxation of dividends,
allowing people to deduct more of their capital
losses, additional bonus depreciation, further
enhancement of retirement saving accounts, and
making estate tax repeal permanent. Meanwhile, the
Business Roundtable has floated three specific steps
it would like to see taken (discussed below). How
should we judge these
proposals by the Roundtable
and whatever specific ideas the Tax cuts do
White House eventually people money
releases? What are the b
characteristics of a good tax b theeo
package?margin to Pro
First, let us get the ............
analysis right. It is time to lay
to rest obsolete notions of how tax cuts work. Tax
cuts do not work by giving people money to spend.
When the government cuts taxes without cutting
spending, it immediately borrows the money back.
There is no increase in aggregate consumer
purchasing power, and no immediate boost to
consumer spending from a tax cut. (The only
exception is if the Federal Reserve steps in to buy
up the new government debt, in which case the
additional spending comes from a shift in monetary
policy, not from the tax cut. Monetarist economists
like Milton Friedman and neo-classical economists
like Norman Ture have pointed this out forcefully
and repeatedly since the 1960s, and the evidence
backs them up.)
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Tax cuts boost the economy, if they work at all,
by increasing incentives at the margin to produce
more. That is, they encourage additional hours of
work and additional hiring, additional saving and
additional investment in plant, equipment, and
buildings. The added supplies of labor and capital
combine to produce added output, for which the
suppliers get paid. Only after the tax changes lead
people to offer more of their services and increase
their output is there an increase in national income,
and only then do people have more income to
spend. Demand then rises
with supply. Without added
ork by givng supply, demand and income
md.. Tax cuts don't increase.
if they work at The only tax cuts that
centves ait the have these beneficial effects
onre. are those that impact
................. .incremental income and cost
calculations. These include:
faster write-off of investment, lower marginal tax
rates on earning additional wages, dividends,
interest and capital gains, reduced double taxation of
corporate income, and reductions in the add-on tax
on the savings that constitute estates.
The Business Roundtable has proposed three tax
reductions (BRT press release, November 21, 2002)
and has declared that all of them would be of
benefit because [it thinks] they would give
consumers and savers more money to spend. The
three Business Roundtable proposals are:
1) Eliminate for a year the Social Security
payroll tax (excluding medicare) on employers and
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