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INTRODUCTION
On June 7, 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA, PL 107-16). The largest tax cut in 20 years, EGTRRA reduces income tax rates, repeals the estate tax, alters the taxation of children, marriage, saving, and education, and rescinds (or "sunsets") all of its provisions in 2010. This paper provides a preliminary evaluation of the new law.
The next section summarizes the major provisions and revenue effects of the tax bill, and highlights two areas of significant unfinished business-the sunset rules and the dramatic increase in taxpayers who will face the alternative minimum tax (AMT). Few observers believe the sunset and AMT provisions will remain as currently legislated, but alternative ways of resolving these issues significantly affect analyses and conclusions regarding the tax cut. We generally analyze EGTRRA as if the sunsets are removed and the AMT is reduced to keep the number of AMT taxpayers the same as under pre-EGTRRA law.
The third section examines the tax cut relative to the federal budget. The notion that the federal government was running a large surplus at the beginning of 2001 was perhaps the most popular argument in favor of a tax cut. We show, however, that federal budgeting procedures misstate the underlying financial status of the government. After adjusting the budget figures to obtain a more meaningful measure of available resources, we find that the tax cut will cost more than the entire available surplus that was projected in spring 2001 for the next ten years. Over longer time horizons, the government faced significant deficits even before the tax cut was enacted, and EGTRRA significantly exacerbates this problem. The difference between official and adjusted budget figures has several implications for the tax cut debate, most notably that EGTRRA is not fiscally sustainable and therefore implies some combination of future spending cuts or revenue increases. In addition, our budgetary analysis shows that claims that tax cuts were needed to avoid paying off the public debt were misleading.
The fourth section examines distributional effects. By any reasonable measure, the tax cut makes the tax system less progressive with respect to current income and provides particularly large benefits to households in the top 1 percent of the income distribution....