Wisconsin Public Radio

Manufacturing is still critical to the economy United States. Clyde Prestowitz, says it's time to start realizing the positive spillovers that manufacturing creates... Read more  

Events & Activities

Stephen Olson at Chinese Development Institute Conference


 Clyde Prestowitz giving presentation to CDI...


Steve Olson teaching trade negotiations at the Mekong Institute...


Stephen Olson to speak at upcoming workshop organized by the International Institute for Trade and Development on 

"Economics of GMS Agricultural trade in goods and services towards the world market"

Chiangmai, Thailand Sep 8-12.


(02/04/2001 - Dodd) Bad Timing: Bush Tax Cut Is Far Too Small Upfront And Far Too Large In Later Yea

HEADLINE: BAD TIMING Bush Tax Cut Is Far Too Small Upfront And Far Too Large In Later Years   
Randall Dodd and Max B. Sawicky
643 words
4 February 2001
Charleston Gazette
(Copyright 2001)

WASHINGTON - Preventing a recession is like courtship. Timing is everything. The economy will never love a tax cut that gives too little when it yearns for more. Nor will it love one that gives too much when it needs some space. </FD:"Lead"> This is roughly the problem with President Bush's tax policy. It is too small now, when less is not more, and too large later, beyond the horizon of the current economic slowdown.

Since economic growth is flagging, any proposed stimulus should be one that takes effect immediately. The effects of President Bush's proposal, in an effort to hold down costs over the next 10 years, are delayed. The initial impact of his tax cut is about $21 billion, or 0.2 percent of U.S. output - too little for any meaningful stimulus.

Most of the Bush tax cut benefits the richest Americans. These high-income beneficiaries are likely to bank a good bit of their windfall. But low- and middle-income people need to spend every dollar they get in order to support their living standards.

If half of the first year's tax cut is saved, then the tiny 0.2 percent becomes 0.1 percent. The huge cost of permanent tax cuts could spook the bond markets and their champion, Alan Greenspan. Fears of the long-term effect on the budget could push interest rates up and the economy down.

In his congressional testimony, Green-span said that there should be an option of reducing the size of a tax cut if the surplus turns out to be smaller than expected.

These higher rates will raise the cost of short-term debt, variable rate debt and any new borrowing, thereby hurting heavily indebted businesses, new borrowing for investment and interest-sensitive purchases (like houses and cars). Higher rates also have a strong depressing effect on securities prices, as we have seen in the past year.

Here again, timing makes matters worse. Financial markets will react to the tax cuts and hike interest rates well before the cuts show up in paychecks and tax returns. These negative effects will block the tiny stimulus. No wonder that we saw Bush's own nominee for Treasury secretary, Paul O'Neill, disclaim the notion that Bush's tax cuts could avert an economic downturn.

We have to hope that Greenspan's Fed will further reverse last year's tightening policy with additional decreases in short-term interest rates. With significantly lower intermediate and long-term rates, households, businesses and municipal governments can refinance their debts, clearing the way for more consumption, investment and local government spending.

Besides waiting for Greenspan, the best fiscal policy is a quick kiss on the cheek for consumers. This could be accomplished in a variety of ways, both on the tax and spending sides.

In thinking of suitable tax-cut beneficiaries, we ought to consider those working families who will suffer the most in a downturn. The vast majority of taxpayers owe more in payroll taxes than in income taxes; they should be first in line for tax cuts.

We should be especially wary of recession fears being exploited to provoke an unthinking stampede toward permanent income tax cuts. Permanent cuts that are considered affordable in the long run are likely to be insignificant in the short term.

Conversely, a cut that would be large enough to matter over the next six months would be inordinately large, if it remained in law for an extended period of time.

We will know the new administration is serious about averting a recession when it proposes measures that kick in today and automatically sunset when economic indicators improve; otherwise, it'll just prove lovesick.

Document cgaz000020010801dx24004qb

Join our mailing list

Latest Publications

The Betrayal of American Prosperity.

The Trans-Paific Partnership and Japan.

Making the Mexian Miracle.

Industrial Policy and Rebalancing in the US and China.

The Evolving Role of China in International Institutions.


Contact us

Economic Strategy Institute

1730 Rhode Island Avenue, NW, Suite 414 |  Washington DC  |  20036
Ph (202) 213-7051  |  Fax (202) 965-1104  |  info@econstrat.org