Bush Administration Tax Policy: Short-Term Stimulus

This paper examines the effects of recent tax cuts as a short-term economic stimulus. The passage of the tax cuts was well-timed to offset economic downturns, but several elements of the structure of the tax cuts were poorly designed to provide short-term stimulus. For example, the tax cuts were predominantly back-loaded and did not channel funds toward groups with the highest marginal propensity to consume additional resources. Many provisions were intended to stimulate saving, not consumption. As a result, the tax cuts had at best a small "bang for the buck" relative to other options. An alternative package one containing significant state fiscal relief and tax cuts targeted at low-income households could have provided more stimulus with lower budgetary costs. The tax cuts played a relatively minor role in the economic recovery, compared to monetary policy and other factors.