The Effects of the Capital Gains and Dividend Tax Cuts On the Economy and Revenues

Publication Date: July 2007

Publisher: Center on Budget and Policy Priorities (Washington, D.C.)

Author(s): Aviva Aron-Dine

Research Area: Banking and finance; Economics

Keywords: Tax code; Economic projections; Fiscal future; Federal budget

Type: Report

Abstract:

With the fourth anniversary of the 2003 capital gains and dividend tax cuts just past and the Office of Management and Budget’s Mid-Session Review released today, supporters of making these tax cuts permanent are reiterating their claim that the tax cuts boosted the economy and increased federal revenues. For example, a release from the Senate Republican Policy Committee contends that the tax cuts “contributed to today’s strong pro-growth economy” and “have also led to a surge in tax receipts” and that allowing these tax cuts to expire as scheduled would “have devastating consequences for the economy.” Claims like these raise three basic questions. First, has the economic and revenue growth of the past few years really been unusually strong? Second, are there good reasons to think that the capital gains and dividend tax cuts caused whatever economic and revenue growth has occurred, as opposed to just coinciding with it? Third, would extending these tax cuts boost economic and revenue growth on a longer-term basis? The last four years of data, as well as some important new academic research, suggest that the answer to each of these questions is No.