The economy would get a boost if President Bush's first-term tax cuts were made permanent, but only if other taxes were not raised to pay for the lost revenue, the Treasury Department said Tuesday.
The department estimated that the economy's annual output could be boosted by 0.7 percent in the period beyond 2016 if the reductions in tax rates and other tax cuts passed in 2001 and 2003 are made permanent.
To achieve this positive economic benefit, the study assumes that beginning in 2017, government spending is reduced to pay for the tax cuts.
However, if Congress decided to boost other taxes to make up the lost revenue, the Treasury study estimates that the positive benefit to growth would disappear. Instead, it estimates that the higher taxes in other areas would reduce economic output, as measured by the gross domestic product, by 0.9 percent annually in the years after 2016.
Politics of tax cuts
Democrats said the findings of the study proved their point that the cost of making Bush's tax cuts permanent would be detrimental to the economy.
"Once you cut to the heart of the report, the Bush administration admits that their policy of increased federal spending and massive tax cuts wold reduce economic growth in the long run," said Rep. Charles Rangel, D-N.Y.,
"Democrats have warned against burning the candle at both ends, but our concerns have fallen on deaf ears in this administration," Rangel, the top Democrat on the Ways and Means Committee, said in a statement.
The Treasury report, titled "A Dynamic Analysis of Permanent Extension of the President's Tax Relief," sought to estimate the economic effect of extending the tax cuts, which are set to expire after 2010.
The study divided the tax cuts into different groups. It found that the economy would get a long-term boost in growth of 0.4 percent annually by reducing the tax rate on dividends and capital gains, which would spur investment.
When this tax reduction was added to effect of cutting individual tax rates, the long-term boost to the economy was estimated at 1.1 percent annually.
However, when the other parts of Bush's first term tax cuts - increasing the child tax credit, reducing the marriage penalty and adding a 10 percent bracket - were added, the long-term economic impact was reduced to 0.7 percent annually because these proposals did not provide direct boosts to growth.
Repeal of tax cuts not analyzed
The Treasury report said the impact of making repeal of the estate tax permanent was not analyzed because of "considerable uncertainty" in how such a change would affect people's tax planning going forward.
The report on the effects of tax changes on economic growth is something the administration would like to do in the future. It asked Congress as part of the president's budget in February for $513,000 to create a "Division of Dynamic Analysis" at the Treasury Department.
Many Republicans in Congress have been pushing for a process known as "dynamic scoring" where the impacts of tax cuts on economic growth are estimated.
Supporters believe this would show that certain tax cuts, by stimulating economic growth, would not cost as much in lost revenue to the Treasury as is indicated by the current scoring method.
However, opponents argue that dynamic scoring is too speculative and would decrease the real impact tax cuts would have on government revenues.
The Treasury study did not provide any estimates on the costs of making Bush's tax cuts permanent.
However, when the administration released its 2007 budget in February, it estimated the cost of its tax cut proposals over the next decade at $1.7 trillion. The president sees making the tax cuts permanent as a top priority of his second term.