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Tuesday, January 4, 2011

Tax Cuts for Short-Run Economic Stimulus: Recent Experiences

Jane G. Gravelle
Senior Specialist in Economic Policy

Although the economy is recovering from the 2007-2009 recession, unemployment continues to be high and further stimulus may be considered in the 112th Congress. This stimulus could include individual tax cuts and business tax provisions. In recent years, several different types of short run fiscal stimulus measures have been enacted: an individual income tax rebate in 2001, a temporary investment incentive (bonus depreciation) in 2002, and dividend relief in 2003. The February 2008 stimulus included a rebate, bonus depreciation, and small business expensing. A stimulus adopted in February 2009 included a large component of spending, but also extended bonus depreciation and small business expensing. It also enacted an income tax credit that was spread over two years. In December of 2010, in addition to temporarily extending the expiring Bush tax cuts and unemployment compensation, a temporary one-year payroll tax credit was adopted.

Recent analysis and empirical studies suggest the 2001 and 2008 rebates were an effective stimulus, bonus depreciation had a limited effect, and, on theoretical grounds, dividend relief was unlikely to provide an effective stimulus. They also suggest that tax cuts directed to lower-income households are more likely to be effective in stimulating spending.

Date of Report: December 20, 2010
Number of Pages: 9
Order Number: RS22790
Price: $19.95

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