The equation estimates serve as inputs in the subsequent simulations. Two steps are needed in order to simulate the effect of the tax changes on the variables of interest. By comparing the projections with, and without, the tax cuts we are able to identify the net effect of the tax reductions themselves. Employment growth now continues as before, but from a larger base. The effect of tax changes in subsequent years is computed in similar fashion, yielding the results presented in Table 1 above.
Capital stock grows in line with payroll, with adjustment for effects of status quo tax changes.
In answering this question it is helpful to distinguish between static and dynamic revenue effects. The static revenue effect measures the change in tax revenue that results directly from the change in the tax rate, assuming that firms and households do not react to the tax change by altering their behavior. Thus the static revenue effect is measured by the change in the tax rate times the tax base. Most analyses of tax changes only compute the static revenue effects. Of course tax changes do affect behavior.