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U.S.: Some Economists Question Effectiveness Of Tax-Cut Plan

  • Andrew Tully

The U.S. economy -- a linchpin of prosperity worldwide -- is in the third year of a slump. U.S. President George W. Bush says a previous federal tax cut conceived by him helped keep the economy from sagging further. Now he wants a new tax cut for further economic stimulus. Some economists, however, tell RFE/RL that reductions in tax rates do not always work.

Washington, 16 April 2003 (RFE/RL) -- U.S. President George W. Bush says he is determined to reduce the country's federal tax rate, although he is conceding that he cannot enact cuts as deeply as he would like.

Earlier this year, Bush proposed to Congress a tax cut that would reduce federal revenues by $726 billion over 10 years. He said so steep a reduction would be essential to stimulate the nation's struggling economy.

Some members of both the Senate and the House of Representatives -- including members of the president's Republican Party -- have rejected so large a cut. They say that since the economy began to falter in late 2000, the federal budget has swung from generous surpluses to daunting deficits.

The U.S. economy only worsened after the terrorist attacks of 11 September 2001 and the spending for the war in Iraq. The Congressional Budget Office, a bipartisan economic research agency on Capitol Hill, says the president's tax-cut plan would mean a deficit of $1.82 trillion over the next 10 years.

Yesterday -- the deadline for Americans to pay their federal income taxes -- Bush told a group of small-business owners at the White House that he still wants the tax cuts. But he lowered his demand, from cuts of $726 billion to $550 billion.

Bush did not change his reason for wanting the cuts, or the urgency for Congress to act now. "The nation needs quick action by our Congress on a pro-growth economic package. We need tax relief totaling at least $550 billion to make sure our economy grows," Bush said.

Bush's request is in line with what the House is willing to approve. The Senate, however, wants tax cuts totaling no more than $350 billion. Bush appears to be hoping to guarantee success by lowering his expectations to the levels approved by the House, in hopes that the Senate will accept this compromise.

The White House also is seeking broader public support by sending 25 officials of the Bush administration to 57 events in 26 states to promote the president's economic-stimulus plan.

Economists interviewed by RFE/RL said tax cuts can be important in stimulating a struggling economy. But they question whether the current round of cuts proposed by Bush are the right step right now.

One is Alice Rivlin, who served as the White House budget director under President Bill Clinton, Bush's Democratic predecessor. Rivlin said the tax cut that Bush passed in 2001 was not entirely to her liking, but it was ultimately effective. "I think actually the tax cut in 2001 -- although it was much too large -- did have some effect in the near term. The part of it that had effect was the so-called 'rebate,' which was just sending money out to people in the summer and fall of 2001. And I think the evidence is that that helped keep the recession from becoming any worse," Rivlin said.

What Bush did at that time was to reduce taxes retroactively to 2000, so that all taxpayers received government rebate checks ranging from hundreds to thousands of dollars to reimburse citizens' overpayment of that year's income taxes.

Rivlin told RFE/RL that she believes this strategy will not work this time, because many of the cuts proposed by Bush will be phased in over the next decade. As federal revenues dwindle, she said, the federal deficit will grow worse. "[Bush] thinks that these cuts will help the economy grow in the long run. I don't think so, because I think they create very large deficits that will be detrimental to [economic] growth," she said.

Robert Dunn agrees -- somewhat. Dunn is a professor of economics at George Washington University in Washington. He said tax cuts can be important stimuli to the U.S. economy, and can prevent deficits by leading to jobs that generate tax revenue.

But Dunn is emphatic that Bush's current plan, which he said includes too many phased-in tax cuts, will not work. What is needed, he told RFE/RL, is a tax cut that is big enough to translate into real spending, and a tax cut that is enacted immediately.

"I think what [the Bush administration] should do instead is go back and figure out how much you can cut, and then do all of it right now. Forget the 10-year phase-in. This economy needs stimulus right now, and tax cuts that will phase in 2009 and 2010 are utterly worthless," Dunn said.

Bill Frenzel, a former member of Congress, agrees that Bush's 2001 tax cut helped keep the U.S. economy from getting worse. And he believes that Bush's current plan would only stimulate it further. "The combination of what's in the economy now and already appropriated, when added to what's on the drawing boards today, has a reasonable prospect of giving the economy some stimulus and returning it to more normal growth patterns," Frenzel told RFE/RL.

But Frenzel cautions that while some tax cuts may have worked in the past, they are not always guaranteed to work. Frenzel, a Republican from Minnesota, served in the House for 20 years. For a time he was the vice chairman of the House Budget Committee.

Frenzel told RFE/RL that the U.S. economy may be too big to be affected by a tax cut of $100 billion in a given year, for example. But he said it would probably be politically disadvantageous for an American president to appear to be doing nothing in the midst of an economic slump. In fact, that is what caused Bush's father, President George Bush, to lose a chance for a second four-year term in 1992.

"I think it's fair to say that $100 billion in a $13 trillion economy is pretty small potatoes. And even if you took everything that Bush wanted to do in the next two years, there's no certainty that you're going to juice up the economy. But other things being equal, it's better than not doing anything because no one wants to be perceived as going to sleep on the economy when the public thinks it's a problem," Frenzel said.

According to Frenzel, national economies are difficult to predict, and he acknowledged the potential validity of a theory that economic cycles can rarely be affected by the intervention of an individual government.

Dunn, of George Washington University, said that observation may be true of government employment initiatives or similar programs. But he insists that tax reductions can work if they are enacted quickly and focused properly. "The nice thing about tax cuts, as opposed to, let's say, civil-engineering expenditures, is that tax cuts can be put in place fast. If the Congress passes, let's say, a $600-per-person rebate for taxes this year, you could have that money in people's pockets this summer," he said.

On the other hand, according to Dunn, it takes time for Congress to pass legislation creating the civil-engineering program, and to appropriate money for it. He said it may be a year or longer before the first worker is hired, and begins to spend the money he is finally earning. By then, he said, the economic slump may well be over.

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