October 20, 2003

Score One for Tax Cuts

Hold the presses! Someone thinks this year's Bush tax cuts boosted the economy and got it printed in the NY Times. I would declare it the end of the world if the writer were Paul Krugman.

Edmund Andrews writes,

To the surprise of many naysayers, economic data from the past several months suggests that the $350 billion tax-cut package may indeed have jolted the economy.

Congress approved the tax-cutting bill in late May, and consumer spending jumped at annualized rates of more than 12 percent in July and August. Business investment climbed modestly, and manufacturing activity is picking up as well.

Based largely on the unexpected strength in consumer spending, economists believe the economy grew at an annual rate of at least 6 percent in the quarter that ended Sept. 30.

Then Andrews passes along many economists' fears that this growth won't be sustained:

The impact of the tax cuts is already fading, most economists believe. Even though the lower tax rates will continue, the economic jolt comes from the initial cut. After that, the economy simply grows in line with the overall rise in wealth.

That's simply a Keynesian static view of the economy. Tax cuts don't just inject money into people's pockets to be spent or saved. It changes people's incentives to work or invest. Business plans that once seem unprofitable under the former tax rules now look profitable. With higher take-home pay, families may now be able to afford big-ticket items like a new home, car, or appliances. A small business may now be started because marginal income tax rates have been decreased and capital spending can be more quickly depreciated. Small changes on the margins can have large effects on the economy.

"Spotted: Evidence That Tax Cut Worked"