With President Bush’s tax cuts set to expire at the end of 2010, the next administration will have a unique opportunity to reform the U.S. tax code. A recent American Enterprise Institute event focused on the tax policy lessons of the 2000s. The papers and conference panels addressed a number of important questions, including the macroeconomic effects of the Bush income tax cuts, the impact on business activity of the 2002 Jobs Creation and Worker Assistance Act (JCWAA) and the 2003 Jobs and Growth Tax Relief Reconciliation Act (JGTRRA), and the past and future role of environmental taxation. AEI resident scholar Alan D. Viard, who organized the conference, said that “these papers will provide insights into the key tax policy issues facing the next president and Congress.” (The papers can be found here.)

Seth H. Giertz of the Congressional Budget Office said it is difficult to determine revenue loss estimates from the reductions in marginal tax rates under Bush, since the revenue effect can range widely—by as much as 150 percent—depending on behavioral responses to the tax cuts. Georgetown University professor Nada O. Eissa presented a study on the effect of tax cuts on labor participation; she finds evidence of increased workforce participation when marginal tax rates are decreased for low-income earners.

Several papers analyzed the impact of the JCWAA and the JGTRRA on American business and investment. Kevin A. Hassett, AEI’s director of economic policy studies, discussed the growing body of literature that links the “bonus depreciation” provisions in the two tax bills to an appreciable surge in investment. University of Connecticut professor Dhammika Dharmapala showed how the large reduction in dividend taxation included in the JGTRRA spurred a substantial and sudden increase in dividend payments by American companies and altered the portfolio structure of American investors by making equity more attractive relative to debt.

As for “greening” the tax system, Tufts University professor Gilbert E. Metcalf noted that environmental taxes in the United States “are like virtue: much discussed but little practiced.” He argued that it would be more efficient to tax pollution directly, rather than to tax the consumption of goods that pollute or are made from products that pollute. Although he supports a direct carbon tax over the more politically popular “cap-and-trade” scheme, Metcalf acknowledged that, given the proper structure, a cap-and-trade regime could have an economic impact similar to that of a direct tax.

The sunset provisions attached to the Bush tax cuts make it inevitable that the federal tax code will be front and center in American politics come 2010. “We hope that the next administration and Congress will draw on the insights offered by these papers as they make the policy choices that will reshape America’s tax code,” Viard said.

Scott Ganz is a research assistant at the American Enterprise Institute.

Image by Shuttershock/Dianna Ingram.