Aspects of the Sunset of EGTRRA and JGTRRA

Executive Summary

1. Extending EGTRRA and JGTRRA is not about counter-cyclical “stimulus.” The U.S. economy is growing and needs stronger pro-growth policies in order to continue to do so. A permanent and full extension is shown to even have better short-term impacts than a temporary and limited extension. See Table 1.

2. The federal budget is on a dangerous and unsustainable course. The problem stems from federal spending and fixing it should focus on increasing economic growth and reducing growth in outlays. Relying on near-term tax increases may even undercut efforts to rein in spending.

3. The distributional implications of these Acts have been poorly understood and discussions ignore channels by which tax burdens are shifted. In particular, the well-documented impacts of higher individual tax rates on entrepreneurial and small businesses will tend to shift the real burden of higher taxes toward workers and other suppliers.

4. The U.S. income tax system badly desperately needs reform. Viewing extensions of aspects of EGTRRA and JGTRRA from this perspective places a premium on extending low   marginal tax rates, low and equal rates on the cash-flow returns to innovation and investment, and allowing the anti-growth, tax-based subsidies to consumption to sunset.

The full testimony by President Doug Holtz-Eakin is available here, as well as the link to watch the Senate Finance Committee hearing on the future of individual tax rates.