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Dynamic Effects of Extending the 2001 and 2003 Income Tax Cuts

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  • John Diamond

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    Abstract

    This paper focuses on the impact of permanently extending most of the provisions in EGTRRA and JGTRRA, coupled with potential legislative changes to the AMT, on the federal deficit, the distribution of after-tax income, and economic growth. The paper shows that including moderate behavioral responses offsets 16 percent of the static revenue loss estimate from 2005 to 2014. In addition, including behavioral responses implies that the percentage change in after-tax income from permanently extending the 2001 and 2003 income tax cuts would be largest for taxpayers with incomes ranging from $20,000 to $40,000. Finally, the simulation results suggest that extending the 2001 and 2003 income tax cuts and reducing the growth rate of government spending (excluding Social Security and Medicare), assuming that government expenditures are cut to avoid dramatic increases in government consumption relative to GDP in comparison to historical norms, would increase investment, employment, and output. However, postponing the implementation of tight spending controls would more than offset the positive benefits of lower tax rates on the size of the economy and leave future generations with fewer resources for private consumption and production. Copyright Springer Science + Business Media, Inc. 2005

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    File URL: http://hdl.handle.net/10.1007/s10797-005-0493-9
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    Bibliographic Info

    Article provided by Springer in its journal International Tax and Public Finance.

    Volume (Year): 12 (2005)
    Issue (Month): 2 (March)
    Pages: 165-192

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    Handle: RePEc:kap:itaxpf:v:12:y:2005:i:2:p:165-192

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    Web page: http://www.springerlink.com/link.asp?id=102915

    Related research

    Keywords: taxes; fiscal policy; deficits; macro economic effects;

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    1. Christopher L. House & Matthew D. Shapiro, 2004. "Phased-In Tax Cuts and Economic Activity," Macroeconomics, EconWPA 0404009, EconWPA.
    2. Alan J. Auerbach & Jonathan M. Siegel, 2000. "Capital Gains Realizations of the Rich and Sophisticated," NBER Working Papers 7532, National Bureau of Economic Research, Inc.
    3. Emmanuel Saez, 1999. "The Effect of Marginal Tax Rates on Income: A Panel Study of 'Bracket Creep'," NBER Working Papers 7367, National Bureau of Economic Research, Inc.
    4. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1992. "The Carnegie Conjecture: Some Empirical Evidence," NBER Working Papers 4118, National Bureau of Economic Research, Inc.
    5. Auerbach, Alan J., 1989. "Capital Gains Taxation and Tax Reform," National Tax Journal, National Tax Association, vol. 42(3), pages 391-401, September.
    6. Martin Feldstein & Joel Slemrod & Shlomo Yitzhaki, 1981. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains," NBER Working Papers 0250, National Bureau of Economic Research, Inc.
    7. Gillingham, Robert & Greenlees, John S., 1992. "The Effect of Marginal Tax Rates on Capital Gains Revenue: Another Look at the Evidence," National Tax Journal, National Tax Association, vol. 45(2), pages 167-77, June.
    8. Austan Goolsbee, 2000. "What Happens When You Tax the Rich? Evidence from Executive Compensation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(2), pages 352-378, April.
    9. Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc.
    10. Eric M. Engen & R. Glenn Hubbard, 2004. "Federal Government Debt and Interest Rates," NBER Working Papers 10681, National Bureau of Economic Research, Inc.
    11. Gale, William & Slemrod, Joel, 2001. "Death Watch for the Estate Tax?," MPRA Paper 56440, University Library of Munich, Germany.
    12. Harvey, Robert P. & Tempalski, Jerry, 1997. "The Individual AMT: Why it Matters," National Tax Journal, National Tax Association, vol. 50(3), pages 453-73, September.
    13. Joel Slemrod & William Shobe, 1990. "The Tax Elasticity of Capital Gains Realizations: Evidence from a Panel of Taxpayers," NBER Working Papers 3237, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Zodrow, George R. & Diamond, John W., 2013. "Dynamic Overlapping Generations Computable General Equilibrium Models and the Analysis of Tax Policy: The Diamond–Zodrow Model," Handbook of Computable General Equilibrium Modeling, Elsevier.

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