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146 IRET Congressional Advisory 1 (2003)

handle is hein.taxfoundation/iretcgadv0143 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. January 7, 2003 Advisory No. 146 THE BUSH TAX PLAN AND THE HOUSE DEMOCRATIC LEADERSHIP ALTERNATIVE President Bush has proposed a larger-than- expected program of tax relief aimed at hastening the economic recovery and promoting long term growth. The major growth elements of the plan - accelerating scheduled tax rate cuts, ending the double taxation of dividends, expanding expensing for small businesses - would indeed push the economy's growth buttons. They would provide the sort of incentives that promote economic expansion and would increase investment, productivity, jobs, and wages both in the short run and for the longer term. They would also be consistent with fundamental tax reform, which means reducing the biases against saving and investment found in the current broad-based income tax system. Other features of the Bush plan, more minor in cost and economic effect, address social issues (the marriage penalty) or spread the wealth of the tax cut to people with limited tax liabilities, or assist the unemployed. These latter proposals may be necessary to help ensure passage of the program, and to ease hardship among the unemployed. However, these provisions would not, by themselves, provide incentives to increase economic activity or jobs. Any pump-priming which old-style analysis might attribute to these provisions is a mirage. The smaller Democratic tax cut alternative introduced on January 6 by the House Democratic leadership consists mainly of one-time refundable tax rebates, extended unemployment assistance, and aid to the states. The plan is mostly aimed at generating a quick boost in consumer and state spending in 2003, and is the old, ineffective pump-priming approach at work. The Democratic plan contains virtually none of the incentives that would actually succeed in expanding economic activity. Cost is not the measure of effectiveness. The Bush plan would cost $674 billion over ten years (not counting the revenue effect of additional growth.) The Democratic alternative would cost $136 billion over ten years, all up front. The dollar amounts of the plans are less important than how they are structured to affect incentives. The Bush plan is not only larger than the Democratic alternative; it is far better structured to promote economic growth and employment. The President's plan: - Speed up the 2001 tax reductions that have not yet taken effect. * The marginal tax rate reductions due in 2004 and 2006 would become effective, retroactively, on January 1, 2003. The top tax brackets would fall to 25%, 28%, 33%, and 35%. * Marriage penalty relief scheduled to phase in through 2009 would become effective in 2003. (It would accelerate the scheduled expansion of the 10% bracket for all filers and the scheduled widening of the 15% bracket and standard deduction for married couples to twice the amounts allowed for single filers.) * The child credit would jump from $600 to $1,000 per child this year instead of in 2010. S I gg~ g

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