Tax Policy Lessons from the 2000s Point to Future Improvements

WASHINGTON, JUNE 3, 2008 -- With the Bush tax cuts set to expire at the end of 2010, the next administration will have a unique opportunity to reform America's tax code. But what do we know about the effects of this decade's tax policies? On May 30, the American Enterprise Institute hosted a day-long conference on tax policy lessons from the 2000s, bringing much-needed critical perspectives to the coming debate.

The papers and conference panels addressed a number of important questions, including the macroeconomic effects of the Bush income tax cuts, the impact of the Jobs Creation and Worker Assistance Act of 2002 (JCWAA) and Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) on business activity, and the past and future role of environmental taxation in the United States. AEI resident scholar Alan D. Viard, who organized the conference, commented that "these papers will provide insights into the key tax policy issues facing the next president and Congress."

A number of panelists discussed the economic implications of the income tax cuts enacted under the Bush administration. Seth H. Giertz of the Congressional Budget Office highlighted the difficulties of determining revenue loss estimates from the reductions in marginal rates under Bush, as the revenue effect can range widely--as much as 150 percent--depending upon behavioral responses to the tax cut. Georgetown University's Nada O. Eissa presented a study on the effect of tax cuts on labor participation, finding evidence of increased workforce participation when marginal tax rates are decreased for low-income earners.

Several papers discussed the impact of the JCWAA and JGTRRA on American business and investment. Kevin A. Hassett, AEI's director of economic policy studies, discussed the growing body of literature on the "bonus depreciation" provisions in the two tax bills that shows an appreciable surge in investment. The University of Connecticut's Dhammika Dharmapala illustrated how the large reduction in dividend taxation included in JGTRRA precipitated a substantial and sudden increase in dividend payments by American companies and altered the portfolio structure of American investors by making equity more attractive relative to debt.

Environmental taxation is a topic that has been brought to the center of American politics recently with the ongoing debate over the Lieberman-Warner Climate Security Act, which would introduce a cap-and-trade system to control emissions. Gilbert E. Metcalf of Tufts University noted that environmental taxes in the United States "are like virtue, much discussed but little practiced." He argued that an ideal tax regime would directly tax pollution, rather than the consumption of those goods that pollute or are made from products that pollute. He highlighted the important efficiency and distributional impacts of an environmental tax regime. Finally, although he supports a carbon tax regime over the more politically popular cap-and-trade, he noted that, given the proper structure, a cap-and-trade regime can attain most of the advantages of a direct tax.

The sunset provisions attached to the Bush tax cuts make it inevitable that the tax code will be front and center in American politics come 2010. Viard concluded, "We hope that the next administration and Congress will draw on the insights offered by these papers as they make the policy choices that will reshape America's tax code." 

--SCOTT GANZ

For video, audio, and more information about this conference, visit www.aei.org/event1717/.

AEI's Economic Policy Studies program sponsors research on today's tax policy challenges:

• Alan D. Viard is the primary author of AEI's Tax Policy Outlook series. In addition to his surveys of corporate taxation, the alternative minimum tax, and consumption taxation, has written widely about state taxation of municipal bonds.
• Kevin A. Hassett has written extensively about energy taxes.
• Several AEI scholars--including Hassett, Viard, Aparna Mathur, and Alex Brill--have been researching the corporate income tax.
• Contributors to AEI's Environmental Policy Outlook series have frequently commended the merits of a carbon tax over cap-and-trade.

For more information about Economic Policy Studies at AEI, visit www.aei.org/economicpolicy/ or contact Scott Ganz at scott.ganz@aei.org or 202.862.4873.

For media inquiries, contact Véronique Rodman at vrodman@aei.org or 202.862.4870.

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