The intuition behind these results is noteworthy. Gale
and Potter (2002) do not show that reductions in tax
rates have no effect, or negative effects, on economic
behavior. Rather, the improved incentives of reduced tax
rates—analyzed in isolation—increase economic activity by
raising labor supply, human capital, and private saving.
Indeed, these factors are estimated to increase the size
of the economy in 2011 by almost 1 percent. But EGTRRA
and JGTRRA were sets of tax incentives financed by
increased deficits. The key point is that the tax cut
reduced public saving (through higher deficits) by more
than it increased private saving. As a result, national saving
fell, which reduced the capital stock, even after adjusting for
international capital flows, and lowered GDP and GNP. Thus,
the effects on the deficit are central to the findings