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Dynamic Effects of Extending the 2001 and 2003 Income Tax Cuts

  • John Diamond

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    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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    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
    Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=102915

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    1. Gale, William & Slemrod, Joel, 2001. "Death Watch for the Estate Tax?," MPRA Paper 56440, University Library of Munich, Germany.
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    11. 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.
    12. Eric M. Engen & R. Glenn Hubbard, 2004. "Federal Government Debt and Interest Rates," NBER Working Papers 10681, National Bureau of Economic Research, Inc.
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