Macroeconomic Analysis of a 10 Percent Cut in Income Tax Rates: Technical Paper 2004-07

Working Paper
May 1, 2004

Robert Dennis, Douglas Hamilton, Robert Arnold, Ufuk Demiroglu, Tracy Foertsch, Mark Lasky, Shinichi Nishiyama, Larry Ozanne, John Peterson, Frank Russek, John Sturrock, and David Weiner

This paper explores the effects of a simple policy change—a 10 percent tax cut—to shed light on the different models CBO uses to examine the macroeconomic effects of policy changes. Most of the models predict that such a simple tax cut will increase GDP and therefore that the revenue loss from the tax cut will be smaller than the conventional estimate predicts over the first 10 years. None of the models predict that as much as 25 percent of the conventional cost could be offset, however.

This paper is an expanded version of a paper presented at the National Tax Association’s annual conference on November 14, 2003.