CBO Fails to Account For Growth From Tax Cuts

WASHINGTON – In 2003 President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). The legislation cut income tax rates, reduced the capital gains tax rate by 25 percent and substantially reduced the double tax placed on dividends. Immediately following the tax cut, economic growth, job creation, stock prices, dividends, and personal income skyrocketed. The 2003 tax cut has been an unmitigated success and should be extended.

We have demonstrated that the Congressional Budget Office and Joint Committee on Taxation have a record of underestimating tax revenues following tax cuts. They make this mistake because they do not account for the increased economic growth that accompanies tax cuts. Four months after passage of the 2003 tax cut, the Congressional Budget Office (CBO) predicted GDP growth to be just 2.2 percent for 2003 and 3.8 percent for 2004. Yet, GDP finished with 2.7 percent growth in 2003, 50 basis points higher than expected. 2004 exceeded the CBO forecast by an additional 40 basis points in 2004. The 90 basis point difference is a cumulative $247 billion through 2005 or $2,038 per household. Their predictions following the 1997 tax cut were similarly mistaken.

Congress needs to extend the lower tax rates on dividends and capital gains.

CBO Again Underestimated Economic Growth