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 Home > News & Policies > February 2002

February 15, 2002

Economic Report: Tax Relief Package Created Jobs and Softened Recession

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A new report released today by the Council of Economic Advisors provides hard evidence that the tax relief signed into law by the President last year is creating jobs, has provided a powerful economic stimulus, has softened the recession, and has laid the foundation for long run economic growth. According to the report:

  • The tax relief will have helped the private sector create 800,000 more jobs than there otherwise would have been by the end of 2002.  
  • Tax relief has raised the prospects of a solid recovery in 2002 by boosting economic growth by 0.5 percentage point, lifting the expected growth rate from 2.2 percent to 2.7 percent.
  • Without tax relief, third-quarter growth would have been much worse, contracting at a 2.5 percent annual rate instead of the reported 1.3 percent rate. And, in the fourth quarter, real GDP would have fallen 1 percent instead of the advance estimate of 0.2 percent growth.

Other Key Facts From the New CEA Report

  • Tax relief has provided powerful stimulus for the future, with reductions in marginal tax rates that improve incentives and leave in the hands of Americans a greater share of their own money to spend on consumption, education, retirement investment, or whatever else they may prefer.  
  • The tax relief has provided valuable stimulus to economic activity in the short run. The quick enactment last year of the President's tax relief plan softened the recessionary headwinds in 2001 and has helped to put the economy on the road to recovery in 2002.  
  • The timing of the tax rebates and the reductions in withholding proved propitious: they added significant economic stimulus by boosting consumers' purchasing power during a period of sluggish economic activity.
  • The 2001 tax rate reductions were just the first step in a series of income tax rate reductions to be phased in by 2006; by that year the 39.6 percent tax rate will have dropped to 35 percent, the 36 percent rate to 33 percent, the 31 percent rate to 28 percent, and the 28 percent rate to 25 percent. The future rate cuts increase expected disposable income.
  • Tax relief is strengthening families and has reduced the burden of financing education. The marriage penalty was reduced for earned income credit recipients, and the child tax credit increased from $500 to $600 per child in 2001 and will gradually increase to $1,000 by 2010. Adoption credits have been doubled in 2002 from $5,000 per child in 2001; in addition, this credit will apply to more taxpayers because the income threshold at which the credit begins to be phased out is $150,000, up from $75,000. Contribution limits for education savings accounts (formerly called educational IRAs) were raised to $2,000, and distributions were made non-taxable. The law also increased the income phase-out range for student loan interest deductions and made certain higher education costs tax-deductible for households with less than $130,000 in income.
  • Raising taxes, as many in Congress advocate, would not only lower long-run growth prospects but also jeopardize a recovery. An increase in taxes would sap the economy of demand, as individuals and small businesses would see a decline in their after-tax income. Raising taxes could also adversely affect consumer and business confidence about the future.