Tax cuts by U.S. President George Bush and their effects

June 13, 2001

Free Market Foundation

One thing the defection of Sen. James Jeffords probably guaranteed was the rapid passage of President Bush’s tax cut. Jeffords promised Bush his party switch wouldn’t be effective until after the tax bill passed. Each day the bill remained in conference was another day Sen. Tom Daschle was still minority leader and not majority leader. It’s even possible that without the incentive of taking over the Senate, Democrats might have dragged their feet on the bill all summer. As it turned out, Bush got almost everything that was good in either the House of Representatives or Senate version of the bill.

The most important achievement of the bill is to lower the baseline revenues by $1.35 trillion over the next 10 years so that they cannot be spent.

The importance of this fact will become more apparent in a month of so when the U.S. Office of Management and Budget and the Congressional Budget Office issue their mid-session budget updates.

Without the prospect of a tax cut, the prospect of large budget surpluses would have put irresistible pressure on the Congress to spend but with a tax cut in place, the surpluses will be reduced, and what the Congress can’t get its hands on, it can’t spend.

The second most important element of the tax bill is an across-the-board cut in tax rates. The importance of lower rates is twofold. First, they raise the after-tax rate of return on productive economic activity such as work, investment and saving. Second, the top rate is a cap on the most that government can take from the populace. A lower top rate is a kind of protection for the middle class so that they, who pay the bulk of all taxes, can’t be taxed too heavily.

By 2006 the top rate will fall from 39.6 percent to 35 percent; the 36 percent rate to 33 percent; the 31 percent rate to 28 percent; the 28 percent rate to 25 percent; and the bottom 15 percent rate to 10 percent.

Someone in the top bracket who is now able to keep only 60 cents from a $1 increase in his income will now be able to keep 65 cents an 8 percent increase in his incentive to earn taxable income.

Finally, the estate tax (death duties) will be abolished in 2010.

Source: Bruce Bartlett, Senior Fellow, National Center for Policy Analysis.

For text http://www.ncpa.org/oped/bartlett/bartlett01.html

For more on Effects Of Tax Cuts http://www.ncpa.org/pi/taxes/tax21.html

RSA Comment: The wealthiest country in the world is cutting taxes in order to increase economic growth at a time when developing countries continue to impose excessive taxes on their most productive citizens. However, the U.S.A does follow the same unwise policy as other countries of taxing its most productive citizens at higher marginal tax rates. Equal rates of tax for all, with exemptions for the poor, would result in far greater entrepreneurial effort and hence higher economic growth in any country wise enough to re-introduce equal rates. Lower-income citizens would enjoy infinitely greater benefits from higher growth than they do from governments clumsy efforts to transfer wealth. Per capita incomes grow very much faster in high-growth economies, doubling every 10 years at the average GDP growth rate of 7.2% per annum achieved by South Korea over a 20 year period, during which time it kept its total government expenditure (at all levels of government) at around 20% of GDP compare this with the U.S. and South African governments which spend approximately 36% of GDP per annum.

Eustace Davie, Director, Free Market Foundation.