A Supply-Side Success Story

Daniel Mitchell of the Heritage Foundation compares the success of the 2003 tax cuts vs. the 2001 tax cuts and points out that "supply-side" cuts work better because they promote additional economic activity. While the 2001 tax cuts generally offered no economic growth impact, most of the components in 2003 were significantly pro-growth:

1) Accelerated child tax credits – No pro-growth impact. The child tax credit was increased to $1,000 per eligible child. This provision did nothing to improve economic performance since the credits were not tied to economic activity.

2) Reduced tax on new business investment – Significant pro-growth impact. The legislation immediately reduced the “depreciation” tax on new business investment and also expanded the amount of investment that small businesses could “expense” in the year when the cost was incurred, meaning no tax on new investment.

3) Accelerated income tax rate reductions – Significant pro-growth impact. The 2001 legislation included income tax rate reductions, but most of those reductions were postponed until 2004 and 2006. The 2003 tax cut made those lower tax rates effective immediately.

4) Reduction in double-taxation of dividends and capital gains – Significant pro-growth impact. The legislation included provisions that reduced the double-tax on both dividends and capital gains to 15 percent. These reductions took place immediately, thus ensuring no incentive to postpone pro-growth activity.

5) Payment to the states – Moderate anti-growth impact. The 2003 tax legislation included a $20 billion spending increase to subsidize state government spending. This provision resulted in a transfer of resources from the productive sector of the economy to the government.