March 19, 2001

Marginal Tax Rate Reductions and the Economy:
What Would Be the Long-Term Effects of the Bush Tax Cut?
Fact Sheet

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On March 15, the Center on Budget and Policy Priorities released an analysis, Marginal Tax Rate Reductions and the Economy: What Would Be the Long-Term Effects of the Bush Tax Cut? The analysis was prepared for the Center by Peter Orszag, who is president of Sebago Associates (an economic consulting firm) and a former senior economist at the President's Council of Economic Advisers and the National Economic Council. Orszag will join the Brookings Institution this summer as a senior fellow in economics.

The Center's analysis examines the academic literature to assess the claims made by proponents of the Bush tax plan that marginal tax rate reductions would promote economic expansion by improving incentives to work, take risks, and save. The analysis finds that these claims are substantially exaggerated and that the proposed tax cuts might not be beneficial for the economy.

 

Evidence on Effects of Marginal Tax Rates

The first part of the Center analysis examines the historical and academic evidence on the effects of marginal tax rates.

 

Estimate of Net Impact of Proposed Bush Tax Cut

The second part of the Center analysis estimates the likely overall impact of the proposed Bush tax plan on the economy. It concludes that the overall effect in the long run may, if anything, be slightly negative.

  Percentage Point Effect on GDP in 2012
Positive effect from tax reductions +0.4 to +0.5 percent
Minus: Negative effect from reduced national saving -0.6 to - 0.9 percent
OVERALL EFFECT -0.1 to -0.5 percent