Working Paper: NBER ID: w9012
Authors: Alan J. Auerbach
Abstract: Following through on pledges made during his election campaign, President Bush proposed and Congress passed a substantial tax cut in 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). Much has been written about the size of the tax cut, its impact on the federal budget, its distributional consequences, and its short-run macroeconomic impact. There has been less focus on EGTRRA's incentive effects; one of the most important potential behavioral effects is on saving. To analyze the behavioral effects of the Bush tax cut on saving and other macroeconomic variables, I use the Auerbach-Kotlikoff (1987) model in conjunction with the NBER's TAXSIM model. An interesting by-product of this analysis is the 'dynamic scorin g' of the tax cut - the estimated feedback effects of behavior on revenue. By comparing the revenue losses generated by the model with those that would occur without any behavioral response, one can estimate how much of the static revenue loss would be recouped by expanded economic activity. The simulations suggest that dynamic scoring has a significant impact on estimated revenue losses, but that the tax cut's impact on national saving is still negative in the long run.
Keywords: Bush tax cut; national saving; dynamic scoring; macroeconomic variables
JEL Codes: E62; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bush tax cut (H26) | saving (E21) |
| Bush tax cut (H26) | output (C67) |
| saving (E21) | output (C67) |