Bush Administration Tax Policy: Short-Term Stimulus

Peter R. Orszag and
Peter R. Orszag
Peter R. Orszag Chief Executive Officer - Lazard
William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

November 1, 2004


This article examines the effects of recent tax cuts as a short-term economic stimulus and is the fifth in a series that summarizes and evaluates tax policy in the Bush administration.1 A particular goal for each of the 2001, 2002, and 2003 tax cuts was to spur the economy in the short term.

According to the president’s chief economic adviser, N. Gregory Mankiw, the economy has done better in the short term with the recent tax cuts than it would have without: “If we had left taxes exactly as they were when the president took office, many, many more people would be unemployed today. What I’m saying is sort of standard textbook economics” (Catts 2004).

Mankiw’s statement is narrowly and carefuly framed. It does not address the real questions associated with the short-term effects of the tax cuts, and should not be interpreted as evidence that the tax cuts represent effective short-term stimulus for at least two reasons. First, the statement compares the tax cuts to doing nothing, whereas other policy changes—including differently structured tax cuts and spending programs—were and are relevant options. Second, Mankiw’s statement focuses on only whether any stimulus was provided. But in an economy with excess capacity, such as the U.S. economy between 2001 and 2004, many forms of fiscal loosening—whether a tax cut or spending increase—can spur aggregate demand and therefore provide a short-term boost to the economy.