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Sunday, July 22, 2007

Supply-Side Effects of 2001 and 2003 Tax Cuts "Small"

About that Laffer curve:

CBO: Tax Cuts’ Impact Has Faded, by Greg Ip, WSJ Washington Wire: The stimulative effect of Bush’s tax cuts has worn off and the supply-side benefits are “small,” the Congressional Budget Office says. At the request of House Budget Committee [chair] John Spratt (D., S.C.), the CBO analyzed the impact on the economy other than through the direct impact on tax revenues of the Economic Growth and Taxpayer Relief Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).

In a letter to Spratt released Friday, CBO director Peter Orszag said, “The short-term effects of EGTRRA and JGTRRA in stimulating aggregate demand in the economy have largely dissipated by now, and the supply-side effects of those policies are uncertain but are probably small.”

Some of the tax cuts’ provisions “increased incentives for people to work and save (which can increase growth), but other provisions had no effect on incentives. In addition, the two tax laws increased the budget deficit, and doing so tends to reduce economic growth over the medium and long term. At this point in time (several years after enactment), once those various factors have been taken into account, the overall impact of the tax legislation on the economy is likely to be modest,” Orszag wrote.

Orszag concluded that the tax cuts’ indirect impact on economic growth, investment and saving and could affect this year’s budget deficit anywhere from an increase of $3 billion to a reduction of $14 billion, depending on the assumptions used. That is separate from the direct boost to the deficit through lost revenue and the added interest on borrowing to cover the gap of $211 billion.

It currently expects this year’s deficit to be between $150 billion and $200 billion, implying that without the tax cuts, the budget would probably be in surplus this year.

    Posted by on Sunday, July 22, 2007 at 11:07 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (19)


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