Report Taxes

Make the Bush Tax Cuts Permanent

January 5, 2006 3 min read Download Report

Authors: Rea Hederman and William Beach

This Thursday marks the beginning of a renewed effort by the White House economic team to make the 2001 and 2003 tax cuts permanent. Bush Administration officials will carry this message to key states: their tax policy program has helped the U.S. economy to thrive, with steady job creation and strong economic growth. If the tax cuts of 2001 and 2003 are allowed to expire, millions of working families will see their economic prospects dim, their job opportunities diminish, and economic uncertainty rise.

The central provisions of these landmark tax bills are scheduled to expire over the next five years, which means that taxes will rise dramatically for most taxpayers. Between now and January 1, 2011 (five short years away),

Bush tax cuts rates will rise substantially in each tax bracket, some by 450 basis points;
Low-income taxpayers will see the 10-percent tax bracket disappear, and they will have to pay taxes at the 15-percent rate;
Married taxpayers will see the marriage penalty return;
Taxpayers with children will lose 50 percent of their child tax credits;
taxes on dividends will increase beginning on January 1, 2009;
taxes on capital gains will increase, also beginning on January 1, 2009; and
Federal death taxes will come back to life in 2011, after fading down to nothing in 2010.

What make this tax nightmare scenario particularly scary are the economic benefits that will never be realized if the 2001 and 2003 tax cuts disappear. Businesses are watching now to see if Congress will make permanent the first to expire of the major economic growth components of the 2001 and 2003 tax acts-lower taxes on dividends and capital gains. Failing to make permanent the low tax rates on investment would signal to businesses of all sizes that the other major elements of the Bush tax plan will also be allowed to expire. They would adjust their investment and hiring accordingly.

Economists in the Center for Data Analysis at The Heritage Foundation used a mainstream model of the U.S. economy to project the economic effects of making the tax cuts of 2001 and 2003 permanent. Their report estimates significant economic gains throughout the period from 2006 through 2014, particularly after 2008. For example, making certain that taxes on investment remain low will add about 285,000 jobs per year in fiscal years 2008 and 2009. In those two years alone, lower taxes on capital gains and dividends mean an additional $70 billion in economic output and an additional $110 billion in disposable income for households.

If Congress makes the tax cuts permanent, the major economic benefits begin in 2011. For example,

Total employment will rise by 1,087,000 jobs per year, on average;
Annual GDP will be over $111 billion higher, after inflation;
Personal savings will grow by $163 billion per year, on average, after inflation; and
After-tax household income will grow by an annual average of $274 billion per year, after inflation.

However, these benefits become economic losses if Congress fails to make the 2001 and 2003 tax cuts permanent. What is the cost of failing to act? Over one million lost jobs each year between 2011 and 2014; over a hundred billion dollars less in economic output per year; slower wage and salary growth; slower savings growth; and so on. The need for Congress to make the 2001 and 2003 tax cuts permanent is clear.

The four attached charts focus on the employment gains from making the tax cuts permanent-or, alternatively, the forgone potential growth should Congress fail to act. Chart 1 presents the average annual growth in employment for each state between 2008 and 2014 if the tax cuts are made permanent. The year 2008 is important from a policy perspective because investors, workers, and business owners will know then whether or not significantly higher taxes are in their future as the low tax rate on capital gains and dividends is now set to expire on December 31, 2008. Chart 2 presents the average annual growth in disposable personal income in every state if the tax cuts are made permanent. Chart 3 focuses on the states that the Bush economic team will visit in the coming days and covers the four-year period, from 2011 through 2014, during which the biggest economic gains from permanency will be realized, while Chart 4 presents income growth over the same period-but only, that is, if Congress makes the tax cuts permanent.

(Download Charts in PDF Format - 94 kB)

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