Concerns that the economy might be heading toward a recession have led some policymakers to consider economic stimulus legislation. To judge the efficacy of such proposals, some policymakers have expressed a desire to look back at the economic effects of past policy changes. Proponents of the tax cuts passed in 2001, 2002, and 2003 argued that they would have salutary effects on the economy. Particular emphasis was placed on economic stimulus in the short-term. This report traces out the channels through which the tax cuts are thought to affect the economy and assesses the performance of those economic indicators, including gross domestic product (GDP), employment, interest rates, inflation, labor supply, saving, capital investment, and the trade deficit. The report uses theory and data to evaluate the tax cuts' effects through 2004. (This report does not analyze economic developments since 2004. Presumably, individuals had adjusted their behavior to the tax changes by then, and economic developments since have not been significantly influenced by tax cuts enacted several years earlier.) The report also offers an overview of the forecasts of their effects made at the time the tax cuts were passed. Most estimates predicted that the tax cuts would increase economic growth in the short-term and reduce it in the long run. Despite the wide diversity of the models used, all of the results are relatively small, as would be expected of tax cuts that are relatively small in relation to GDP in the years considered. Three tax cuts have been signed into law in recent years. This report focuses on provisions of those bills that caused significant revenue loss from 2001 to 2003. In 2001, the Economic Growth and Tax Relief Reconciliation Act was signed into law (EGTRRA, P.L. 107-16 ). Its major provisions for 2001-2004 were a reduction in marginal income tax rates, an increase in the child tax credit, "marriage penalty" tax relief, and elimination of the estate tax. All of these provisions were phased in gradually over several years, and then scheduled to expire due to budget rules (although it was the framers' stated intent that they become permanent). In 2002, the Job Creation and Worker Assistance Act (JCWAA, P.L. 107-147 ) was signed into law. Its major revenue-side provision was accelerated depreciation for business investment. In 2003, the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA, P.L. 108-27 ) was signed into law. It accelerated the phase in of the main EGTRRA provisions, with the exception of the estate tax provisions, and extended and expanded the accelerated depreciation in JCWAA. It also reduced the tax rates on dividend and capital gains income. In addition, the 2004 Working Family Tax Relief Act (WFTRA, P.L. 108-311 ) extended some provisions of the earlier acts that were slated to expire. It had no revenue effect in 2004. Table 1 gives the estimated revenue loss of the tax cuts and their key provisions as scored by the Joint Committee on Taxation at the time the tax cuts were enacted. Estimates of the cost of the tax cuts based on ex post data do not exist. EGTRRA was the largest of the tax cuts and most of EGTRRA's costs are to occur in the out years. Most of the costs of JGTRRA and JCWAA occurred in the short-term. In fact, because accelerated depreciation is a revenue loser in the short-term and revenue raiser in the medium-term, the 10-year cost of JCWAA is smaller than the short-term cost. In the long run, it was by far the smallest of the three, but of comparable size in the time period considered here. JGTRRA's costs are mainly short-term because it mostly accelerates tax cuts that would have occurred later under EGTRRA. All of the tax cuts are temporary and scheduled to expire, although it was the intention of their supporters that EGTRRA/JGTRRA be permanent. Consistent with the goal of short-term stimulus, this report focuses on the effects of the tax cuts through 2004. Certain provisions that are large in the long run are small to date and will not be explored, most notably the repeal of the estate tax. Other provisions, such as accelerated depreciation, were large in the short run, but not in the long run. Although the costs of the tax cuts are large as a fraction of total receipts, particularly in the out years, the costs as a percentage of gross domestic product (GDP) in the years of interest are small. The small size of the tax cuts places a low ceiling on their potential economic effects. This is especially the case when evaluating demand-side effects, where their incremental increase from year to year, rather than their absolute value, is the relevant figure. In 2001, the tax cuts (revenue provisions only) were equal to 0.4% of GDP, all of which occurred in the second half of the year. In 2002, they increased 0.7 percentage points to 1.1% of GDP. In 2003, they increased 0.5 percentage points to 1.6% of GDP. In 2004, they increased 0.7 percentage points to a projected 2.3% of GDP. As discussed below, when considering the effects of tax cuts on labor supply and saving, the key measure is marginal tax rates. As seen in Table 2 , the change in average marginal tax rates under EGTRRA and JGTRRA is modest for wages and interest income when fully phased in; however, EGTRRA/JGTRRA leads to a larger decline in marginal rates on capital gains income and a more than 50% decline in marginal rates on dividend income. Because government spending rose as a percentage of GDP in the years when taxes were cut, these tax cuts can be characterized as wholly deficit-financed tax cuts (financed by increasing the deficit or decreasing the surplus). This is important to note because deficit-financed tax cuts have a different economic effect than tax cuts financed by reducing spending or raising other taxes in the models described below. It may be surprising to learn that there is no straightforward way to evaluate how a tax cut has affected the economy . Economists can observe how the economy performed after a tax cut, but because they cannot observe the counterfactual—how the economy would have performed in the absence of a tax cut—there is no direct way to tell what contribution the tax cut made to the economy's performance. If the economy boomed after a tax cut, there is no way of telling whether the economy would have boomed even if the tax cut had not been passed. If the economy grew sluggishly after a tax cut, there is no way of telling whether the economy would have grown even more slowly without a tax cut. Econometric research is based on observing variation between data observations to determine correlation between variables. For studies of individual behavior, variations in the tax cut that individuals receive can be used to establish correlation. If recipients of a tax cut systematically behave differently than nonrecipients, all else equal, it can be deduced that the tax cut caused that behavior. Unfortunately, in the case of tax cuts, variation between individuals is not independent of other control variables needed to hold all else equal. The size and eligibility of a tax cut is based on criteria that may strongly influence an individual's behavior. For example, the size of the marginal tax rate reduction received under EGTRRA is determined by factors such as income. Yet if the experience of individuals in one income cohort is systematically different than in a different cohort, a tax cut could be erroneously attributed as the cause when some other factor was the cause. For example, income inequality has been growing in the United States in recent decades because the income of upper-income cohorts has been rising more quickly than lower-income cohorts. Because EGTRRA gave larger tax cuts to upper-income cohorts on average, the portion of faster income growth caused by growing inequality, unless properly controlled for, would be spuriously attributed to the larger tax cut. For economy-wide studies, the variation studied is typically over time rather than across individuals. In the case of a tax cut, this would entail comparing how the economy performed in periods with the tax cut compared to periods without the tax cut. But because other factors are also changing over time, different control variables are not independent, and causation runs in both directions, it is very difficult to isolate the effect of tax cuts. For example, consider a tax cut implemented to stimulate the economy in response to a downturn. Comparing economic activity before and during the tax cut, simple correlation could lead to the conclusion that tax cuts cause recessions since the timing of the tax cut is associated with a decline in growth. Some other factor is necessary to control for this "endogeneity" problem. Some econometric methods can overcome the endogeneity problem, but greatly limit the number of control variables that can be employed because of insufficient "degrees of freedom." Some time series analysis has been criticized for assuming that individuals do not change their reactions in response to changes in the behavior of policymakers (known as the "Lucas critique"). Because there have been relatively few major tax cuts or increases in recent history, there are relatively few observations to consider. In this situation, economists typically predict a tax cut's economic effects by building econometric forecasting models, calibrating the models to match actual economic data, and then running the model with and without a tax cut. The difference between the two outcomes is said to be the tax cut's economic effects. Notice that this approach does not rely on actual, after the fact data to determine the tax cuts' effects. These simulations are typically run before the tax cut is implemented, and it is rare for the modeler to go back after the fact and test the accuracy of the prediction. As shown in the section below, none of the predictions made for EGTRRA and JGTRRA were based on actual ex-post data.