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1 Robert Carroll, The 2001 and 2003 Tax Relief: The Benefit of Lower Tax Rates 1 (2008)

handle is hein.taxfoundation/ffbebxz0001 and id is 1 raw text is: FFISCAL Au 2008 FACT No. 141 The 2001 and 2003 Tax Relief: The Benefit of Lower Tax Rates By Robert Carroll Summary Recent research on President Bush's tax relief in 2001 and 2003 has found that the lower tax rates induced taxpayers to report more taxable income. In particular, the reduction in the top two tax rates induced taxpayers to report more taxable income-an increase in the size of the tax base-to such an extent that this positive behavioral response likely offset roughly 25 percent to 40 percent of the static revenue loss of lowering the top two tax rates. This research illustrates that, while the lower tax rates have not paid for themselves, they do provide important economic benefits and can expand the tax base to such an extent that they cost the federal government substantially less revenue than the casual observer might think. Moreover, this research may provide valuable insights into the harmful effects of high tax rates as the Presidential candidates' tax plans are evaluated. Economic Effects of the 2001 and 2003 Tax Relief The central component of the 2001 and 2003 tax relief was lower individual income tax rates. For example, the 15 percent rate was lowered to 10 percent for low-income taxpayers and the top tax rate faced by high-income taxpayers was lowered from 39.6 percent to 35 percent. The 10-percent bracket accounted for nearly one quarter of the individual income tax relief. This tax change, combined with the reduction in the marriage penalty and the expansion of the child tax credit, provided a short-term economic stimulus by letting taxpayers keep more of their income. Nevertheless, even though these provisions increased taxpayers' after-tax incomes, they did little to improve economic incentives. Indeed, to the extent these tax provisions were financed with additional government borrowing, they may well have

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