Study Finds Tax Reductions Contributed Significantly to Post-2001 U.S. Economic Expansion

U.S. economic performance thrived on virtually all counts from 2001-2006 despite the negative economic shocks of the 9/11 terrorist attack, global terrorism, wars in Iraq and Afghanistan, Hurricane Katrina and rising energy prices.  A special report by the American Council for Capital Formation (ACCF) presents highlights from a recent analysis of the impact of tax cuts and federal spending over the 2001-2006 period.  This retrospective analysis, conducted by Dr. Allen Sinai, Chief Global Economist of Decision Economics, Inc., concludes that while easier monetary policy, increased federal spending and globalization also contributed, tax cuts, including those for individual capital gains and dividends received, contributed significantly to economic growth, job creation, and real per capita income during this period.

Economic growth really began to accelerate in 2003 as the tax cuts ramped up, the report concludes. Average GDP growth over 2003-06 was double that of 2001-03.  At the end of 2006, the labor market was essentially at full employment, with an unemployment rate of 4.4%.  In addition, workers’ real wages rose as workers started to catch up after an admittedly long period of rising income and wealth inequality.

Using a large-scale macroeconomic model, Dr. Sinai estimated how the U.S. economy would have performed over 2001-2006 if none of the tax cuts had been enacted and if federal spending had not increased. His findings indicate that U.S. GDP growth would have been 0.7% less each year and the unemployment rate would have been 1.2 percentage points higher over 2001-2006 than it actually was.  Considerably less consumption spending would have occurred without the tax cuts. Stronger housing activity, rising real estate prices, and a stronger stock market increased realized capital gains and thus consumption, saving, and government tax receipts.  The tax cut on individual capital gains and reductions in the taxation of dividends, as well as lower personal income tax rates brought about more entrepreneurship, competition, enterprise and financing, small business and self-employed development. While inflation rose a bit and the federal deficit was higher than it would have been absent the tax cuts, Dr. Sinai concludes that the “tradeoff” was worth it because of the increased economic growth, higher profits, more jobs, greater entrepreneurial activity, and lower unemployment rate.

As policymakers and presidential candidates turn their focus to maintaining growth in U.S. employment and GDP during this period of economic uncertainty, the positive lessons from Dr. Sinai’s new research should be clear. “Now is not the time to contemplate tax increases.  In fact, making the current tax rates for individual capital gains and dividends received permanent and maintaining personal income tax rates at present levels would help promote the types of economic activity needed to avoid a downturn or a recession in the U.S.,” said ACCF Senior Vice President and Chief Economist Dr. Margo Thorning.