The Senate simply shifts economy-wide demand back and forth. The House does too, but it also increases economy-wide supply. Investments in human capital pay back through rising productivity and, therefore, rising wages and salaries. Workers have a greater incentive to work harder or better when each additional dollar of income is taxed less heavily. Physical capital is acquired by investing in plant and equipment, through construction and capital goods purchases.
Firms are more willing to make investments if workers productivity increases.
For such a couple, each additional dollar of income is now taxed by the State at a rate of 9.5 percent. Under the Senate plan, it would be taxed at a rate of 8.5 percent, falling to 8.25 percent in 2001. The House can reduce income tax rates more than the Senate because it raises the excise tax rate from 4.0 to 4.5 percent. Suppose this couple spends all their income. A 0.5 percentage point increase in excise taxes on their spending is less than the 3.32 percentage point income tax rate reduction under the House plan.