US Treasury Touts Long Term Benefits Of Permanent Tax Relief

by Leroy Baker, Tax-News.com, New York

27 July 2006

By making certain temporary tax cuts passed during the Bush administration permanent, Congress will help to boost America's economic output in the long-term, according to a new 'dynamic analysis' of the tax cuts by the Treasury Department.

The report, entitled 'A Dynamic Analysis of Permanent Extension of the President's Tax Relief,' studied the long-term economic effect of: lower tax rates on ordinary income; lower tax rates on dividends and capital gains; the 10% individual income tax rate bracket; the doubling of the child tax credit; and reduced marriage tax penalties.

The report concluded that the gross domestic product (GDP) of the United States would grow by an additional 0.7% per year after 2016 if these tax cuts were made permanent.

Interestingly, the Treasury estimated that the lower rates of tax on capital gains and dividends alone would only boost output by about 0.4%. These tax cuts in particular have been credited by the administration for helping to sustain recent economic growth, by boosting investment levels and stimulating job creation.

The report stated that the greatest boost to the economy would come from lowering personal tax rates, which it estimated would lead to a 1.1% boost in the economy.

However, some tax cuts passed under George W. Bush's presidency would actually lead to reduced rates of growth, according to the study. These include the increased child tax credit, the reduced marriage penalty and the 10% lower income tax bracket, which the analysis concluded would cut annual economic growth by 0.7%

Under current legislation, these tax cuts are due to expire at the end of 2010, but Bush has made their permanent extension a priority for his second term.

The Treasury Department stated that its study was evidence that lower taxes will benefit the economy.

"Lower tax rates enable workers to keep more of their earnings, which increases work effort and labor force participation. The lower tax rates also enable innovative and risk-taking entrepreneurs to keep more of what they earn, which further encourages their entrepreneurial activity," the report stated.

"All of these policies increase incentives to work, save, and invest by reducing the distorting effects of taxes. Capital investment and labor productivity will thus be higher, which means higher output and living standards in the long run," it argued.

The Treasury report is a Bush administration initiative intended to outline the economic benefits and pitfalls of the government's tax policy. The President's FY 2007 Budget proposes to create a division of dynamic analysis within the Department of Treasury's Office of Tax Analysis, with funding of $513,000.

The Treasury claims that dynamic analysis provides a more comprehensive and complete approach to analyzing tax policy, by including its effects on the overall size of the economy and other major macroeconomic variables.

However, its opponents argue that dynamic scoring is too speculative and ignores the impact of tax cuts on revenues and government spending.

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