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Besides the two excellent articles that EW posted this weekend challenging
assumptions about unemployment and productivity, this one also appeared in the
NYT. It refers to a report by an Office of Tax Policy Research at the Univ
of Michigan @ http://www.otpr.org/: “How much
of a stimulus these tax cuts will provide depends in part on how much of it
will be spent. Research based on consumer surveys in 2001 and 2002 done by OTPR
Director Joel Slemrod and University of Michigan economics professor Matthew
Shapiro suggest that as little as a quarter will be spent, while the rest will
be saved or used to pay off debt. Times have changed since 2001, but a USA
TODAY/ CNN/Gallup Poll conducted in June 27-29 of this year suggest that the
consumer response may not be much different than it was in 2001-it found that
only 22% of Americans plan to spend their tax cuts.” Click
on the Shapiro-Slemrod findings, “Consumer Response to Tax Rebates” and “Did
the 2001 Tax Rebate Stimulate Spending?” for pdf reports at the above
website. - KWC ECONOMIC VIEW As Stimulus, Tax Cuts May Soon Go
Awry By Louis Uchitelle, NYT, Sunday November 30,
2003 @ http://www.nytimes.com/2003/11/30/business/yourmoney/30view.html
Lauding the Bush tax cuts isn't easy. They have turned a
comfortable budget surplus into a constraining deficit, and they are enriching
the wealthy far more than families with only five-figure incomes. The one mitigating factor is stimulus. The tax cuts are
helping to revive the economy by putting more spending money into people's
pockets. But even that will soon backfire. The stimulus is at its peak right now. During the fiscal
year that ended on Sept. 30, the nation's taxpayers pocketed $117 billion,
mainly from rebates and from reductions in paycheck withholding as lower tax
rates went into effect. That $117 billion, which is the portion of the tax cut
going only to individuals and not to companies, rises to $200 billion in the
current fiscal year, the Congressional Budget Office reports. Most of the windfall from both fiscal years is packed into
the 12 months that started last summer and will end next summer. Not surprisingly,
this front-loading of the tax cuts coincides with the improving economy. But
then the payout declines gradually, snuffing out the stimulus - unless there is
another big tax cut. Or as Chris Varvares, president of Macroeconomic Advisers,
put it, "We have reduced the scope of using fiscal policy to cushion the
economy in the next downturn.'' Tax cuts function as stimulus only when they increase the
amount that people spend. If America's $10 trillion economy expands by $117
billion in a given year, to a total, say, of $10.117 trillion, there is growth.
Among other good things, the additional spending on goods and services
generates jobs for people entering the labor force as the population expands.
And the rising demand for workers begins to absorb those who lost jobs during
the 2001 recession and the weak recovery that followed. The unemployment rate
thus falls. The $200 billion flowing to taxpayers in the current fiscal
year includes the second installment of the $117 billion they received the previous
year and an additional $83 billion. If all $200 billion is spent on goods and
services, then there is still work for the people hired a year earlier, as well
as job creation to satisfy the additional $83 billion in spending. All else
being equal, the economy expands to a total of $10.2 trillion. A big chunk of the $200 billion will come to people as tax
refund checks in the next six months - a timely shot in the arm in a
presidential election year. Then the shrinking begins as the tax cuts run their
course. For fiscal 2005, which starts next Oct. 1, just a month before the
election, the tax windfall for individuals will total only $168 billion. There
will be another drop in fiscal 2006, the Congressional Budget Office estimates,
basing its calculations partly on the tax cuts themselves (80 percent will have
been paid out by 2005) and partly on an assumption about how much taxable
income the economy will generate. The two play off each other. A $10.168 trillion economy, of
course, is smaller than a $10.2 trillion one. The total production of goods and
services declines and, with it, the need for workers. Their wages disappear and
so does the revenue from taxing their pay. The stimulus aspect of the Bush tax
cuts thus shifts into reverse. Economists in the Bush camp argue that the tax-cut stimulus
will continue anyway, in a different,
supply-side format. With more of
their profits exempted from taxes, entrepreneurs will increase their efforts in
pursuit of lightly taxed wealth. The stimulus will shift to them, specifically
to their investments and hiring. The new profits and wages will then be spent
on goods and services, and the economy will grow. Rising demand will result
from rising supply. Hyped-up entrepreneurs are indeed a benefit, but when it
comes to lifting the economy, 70 years of experience has demonstrated that rising demand is crucial, and must come first.
Only then do suppliers really become active, to satisfy the customers knocking
on their doors. The Bush tax cuts encourage this customer demand, though not
efficiently. They work best if every dollar of forgiven taxes is spent.
Unfortunately, only a third is being spent, according to Joel Slemrod and his
colleagues at the Office of Tax Policy Research at the University of Michigan. The
rest has been saved or used to pay down debt, the office found in recent
surveys. By this reckoning, the Bush tax cuts will not do much to
lift the economy. The $117 billion in fiscal 2003 gives birth to only $40
billion in effective stimulus. Much more of
the cuts, perhaps every nickel, would have been spent if the money had been
channeled to the states instead, to pay the salaries of teachers who
were fired to balance budgets. The economy surged in the third quarter, but as
Mr. Slemrod notes, "the tax cuts were not a major part of that growth.'' >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> |
