Can Cutting Taxes Speed up Growth?

Can Cutting Taxes Speed up Growth?

Can Cutting Taxes Speed up Growth?

Can Cutting Taxes Speed up Growth?

The committee: Barry Bosworth, Robert Eisner, Joel Slemrod, and John Taylor.

For most Americans, taxes are their most visible and least pleasant contact with the federal government. Naturally, taxes are almost always near the top of the national policy agenda, and 1996 is no exception. This year, as in many recent years, the focus is likely to be on what is called the "supply-side" aspect of tax policy. Can tax reduction speed up the growth of the nation's output and the incomes of the population by increasing saving, investment, work, education, enterprise, research, and other factors that determine our capacity to produce? When Bob Dole is urged to put economic growth at the center of his election campaign, it is mainly the promise of tax reduction to achieve such effects that people have in mind. There are, of course, other considerations to be weighed in decisions about tax policy--fairness, and costs of compliance, for example--but the growth question dominates current discussion, and we shall mainly concentrate on that in this week's panel.

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Nothing very significant can be said about taxes in general, except that hardly anyone likes them. The effects of tax reduction on economic growth will depend on whether the reduction is an across-the-board cut of income-tax rates, a reduction of corporate-tax rates, a reduction of the tax on capital gains, a reduction of the tax on saved income, or one of a long list of other possibilities.

The effects will depend also on the budgetary context in which the tax cuts are to occur. Would the proposed cut of some taxes be accompanied by increases of other taxes, and if so, which? For example, the "flat tax" that some people propose involves both a reduction of rates and an increase in the income subject to tax because of the elimination of various deductions. Would a proposed tax cut be accompanied by expenditure cuts, and if so, which? In our discussion, we shall try to examine the growth effects of various possible tax programs in their possible budgetary contexts.

Herbert Stein, a senior fellow at the American Enterprise Institute, was chairman of the Council of Economic Advisers under Presidents Nixon and Ford. He died in September 1999.