January 26, 2004

Making the tax rate cuts permanent was one of the initiatives enunciated by President Bush in the State of the Union address. The President's argument was simple and succinct: a permanent reduction reduces uncertainty and fosters a higher level of economic activity. Letting people keep more of what they earn is the right thing to do. Even though he did not mention it, the timing of the recovery and market resurgence coincided with the Bush rate cuts and the reduction of the dividend tax rates. Who says that people do not respond to incentives? The data clearly say they do. Making the tax rate cuts permanent would be a big deal for the economy. To understand why that would be so, one only needs to determine how the nature of the tax rate changes impact the economy's incentive structure.

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