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Key Provisions of Tax Cuts Passed by Congress

Question: What were the key provisions of the tax cuts passed by Congress in spring 2003? How would these tax cuts be represented by the aggregate expenditure model and the IS curve?

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Solution Preview

See attached.

The 2003 Tax Cuts and the Economy

Besides the wars in Iraq and Afghanistan one major point of contention in the last Presidential election was the Tax Act of 2003. The Democrats argued that the Republican administration had bowed down to the conservative interests and the middle and lower class had to bear the brunt of the recession while the rich had it much easier. President Obama, then Democratic Candidate Obama, promised to overrule the 2003 tax act that President George Bush signed in the form of the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) on May 27, 2003. The bill was supposed to increase spending and create new jobs in the economy: typical counter-cyclical policy as argued by the Keynesian model where the government cuts down spending, or releases money into the hands of consumers, in an effort to kick start the economy. The main provisions of the law were:
 Lower tax rates on personal income for all tax payers. The top marginal rate was reduced from 39.5% to 35%, and a new 10% bracket was introduced.
 Lower taxes on business investment, including a much lower tax on dividends and long term capital gains. The law also allowed faster depreciation of machinery and equipment.
 Increased child credit from $500 to $1000.
 Phased-in repeal of the estate tax.
 Married couples were no longer required to pay higher tax than equivalent singles.
The Republican administration and conservative think-tanks of the time saw this as one of the most important policy initiative of its government. The Heritage Foundation even called it the defining legacy of the 108th Congress!

The question then is why was the law needed, and can we explain it using economic theory. The general idea is that taxes reduce the incentive to work, and many people argue that high unemployment rates in many European countries is a consequence of persistently higher income tax, amongst other things. Reducing taxes, and thus raising the disposable income, is considered a sure-shot way to increase expenditure and pull ...

Solution Summary

They key provisions of tax cuts passed by congress are determined. An analysis with comprehensive synthesis evaluate facts are determined.