How Big the Tax Cut?
Subject Tax cuts
Topic Taxes, Spending, and Deficits
Key Words Fiscal Policy, Economic Growth, Budget Deficits, Tax Revenues
News Story

As an election year approaches, the political battles over taxes and spending will intensify. The President's current proposal for a tax cut of $726 billion is already expected to be more in the area of $350 billion. The competition for votes is not strictly along political lines. Even in the Republican ranks, some will not support the full tax cut proposed by the president. One Republican Senator, George Voinovich of Ohio has already stated that he will not support any tax cut that exceeds $350 billion. The senator's major objection relates to the possibility of requiring deficit spending to pay for any tax cut exceeding the $350 billion.

The Bush argument for the tax cut is related to the need to stimulate a sluggish economy. The Bush Administration specifically wants to cut taxes on dividends and capital gains over the next decade. At the end of this ten-year period, the taxes will revert to their previous level. This action, they argue, would serve to quickly increase employment and spending in the economy by providing working capital to those members of society who are responsible for creating jobs. The democrats and some republicans disagree, saying this is simply a tax cut for the rich and the real benefit will come from concentrating on the lower and middle-income households. Additionally, most politicians recognize that once the taxes have been reduced it will be politically distasteful to return them to previous levels.

Even the Senate and the House of Representatives do not agree on the size of the tax cut. A few weeks ago the House approved a tax cut ceiling of $550 billion while the Senate place a lid of only $350 billion on the cut. The final size of the cut will depend just as much on politics as it does on economics.

(Updated June 2, 2003)


How do taxes enter the analysis in a standard Keynesian Income Determination Model?

2. Explain how the tax multiplier affects the level of GDP.
3. Discuss the statement; Politics and economics cannot be separated.
Source David Stout, "House and Senate Nearing Agreement on Size of Tax Cut," The New York Times Online, May 21, 2003.

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