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Economic Effects of Making the 2001 and 2003 Tax Cuts Permanent

Peter R. Orszag and William G. Gale

Abstract

All of the provisions of the landmark tax cuts enacted in 2001 and 2003 are scheduled to expire by the end of 2010. This paper analyzes the economic effects of making the tax cuts permanent. We describe the recent tax cuts and the proposals to make them permanent, and explore the consequences of making the tax cuts permanent with regard to the fiscal status of the government, the distribution of after-tax income, and prospects for long-term economic growth.

I. Introduction

Tax policy has played a central role in the Bush Administration’s economic policy. The 2001 tax cut phased in lower income tax rates, gradually reduced and will eventually repeal the estate tax, and provided additional subsidies for taxpayers who contribute to tax-preferred saving accounts, acquire education, are married, or have children. The 2003 tax cut provided new tax cuts for individuals’ dividend and capital gains income, and accelerated the implementation of many of the changes enacted in 2001. All of the provisions of these tax cuts, however, expire by the end of 2010 and some expire earlier. The Administration has repeatedly called for making almost all of the 2001 and 2003 tax cuts permanent.

This paper examines the consequences of making the tax cuts permanent. Section II briefly describes the recent tax cuts and the proposals to make them permanent. It also discusses two issues that must be addressed in evaluation of permanent tax options: the alternative minimum tax, and the need to finance permanent tax cuts at some point with either spending cuts or other tax increases.

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