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News > Economy
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Tax cuts may disappoint
President Bush says the $350B tax cut will cure the economy. Some economists aren't so sure.
May 22, 2003: 4:46 PM EDT
By Mark Gongloff, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Congress is likely to pass a tax-cut package this week, giving a clear political victory to President Bush, but some economists doubt whether the $350 billion package will help the ailing U.S. economy all that much.

House and Senate negotiators have hammered out a deal to cut taxes by about $330 billion and give cash-strapped states $20 billion in aid. The plan includes some temporary cuts in individual taxes on corporate dividends, an acceleration of previously scheduled cuts in tax rates and a higher child tax credit.

“ For $350 billion, we're not getting a lot of stimulus to the economy. ”
Ethan Harris
Lehman Brothers chief economist

President Bush -- who first asked for a $726 billion tax cut, then a $550 billion cut, and once derided a $350 billion plan as "little bitty" -- says even this smaller package of cuts will boost the economy, which has grown at a sluggish pace this year, leading to about half a million job cuts and rising unemployment.

"The principle of the bill is pretty simple," Bush told reporters as he took a victory lap around Capitol Hill Thursday morning. "We believe the more money people have in their pockets, the more likely it will be that somebody can find a job in America."

Some economists agree, saying tax cuts will give more money to consumers -- whose spending fuels two-thirds of the economy -- while dividend tax cuts will encourage stock-buying, giving a lift to the stock market and boosting corporate and consumer confidence.

"This is a very good plan -- I say that not because I'm a Democrat or a Republican, but because it's the right thing for the economy," said Anthony Chan, chief economist at Banc One Investment Advisors.

For all his praise, though, Chan didn't think the plan would give economic growth much of a boost this year.

"I don't think this is going to increase gross domestic product (GDP) that much -- we're talking about 0.3 percent growth to the overall economy based on this package," Chan said.

Other economists were a little more optimistic. Salomon Smith Barney economist Chris Wiegand said the plan could boost growth in GDP, the broadest measure of the nation's economy, by at least half a percentage point in 2003 -- to more than 3 percent from about 2.5 percent.

But that's still a bit short of the 3.5 percent rate many economists think is necessary to create jobs.

"This package will not, by itself, create a whole lot of jobs," said Mark Zandi, chief economist at Economy.com, who thinks the plan will add just a quarter point to GDP growth in 2003 and another half point in 2004.

But Zandi said the tax cut could create a better environment for businesses, possibly creating more jobs a little sooner.

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CNNfn's Louise Schiavone reports on the tax cut compromise reached by the House and Senate.

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Even more optimistic was Brian Wesbury, chief economist at Chicago investment firm Griffin Kubik Stephens & Thompson and a vocal supporter of Bush's tax plan.

He thinks simply passing a tax cut will be a relief for business executives, who might have sat on their hands waiting for Congress to settle on a package before making spending and hiring plans.

"GDP growth could be a full percentage point higher this year, but the difference in growth between the first half and second half will be higher than that -- we could get 4.5 percent to 5 percent GDP growth in the second half," Wesbury said.

'Relatively small impetus'

At least two people -- two vocal, famous and rich people -- strongly disagree.

Billionaire investor and all-around financial guru Warren Buffett, in an opinion piece in Tuesday's Washington Post, called the plan to cut dividends "class welfare ... for my class."

Then, in a televised interview Tuesday, Buffett's fellow billionaire investor George Soros accused Bush of "using the recession to redistribute income to the wealthy."

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When $200 billion doesn't go far

Other analysts have been kinder than that, but their estimates about the economic boost that tax cuts might provide have been decidedly less optimistic than those of Wesbury and some other tax-cut supporters.

The Congressional Budget Office (CBO), in a study headed by economist Douglas Holtz-Eakin -- hand-picked for the job by the White House -- said Bush's full $726 billion proposal would have "relatively small impetus in an economy the size of the United States" and that "the net effect on economic output could be either positive or negative."

The CBO estimated additional GDP growth of 0.5 percentage points in 2003 and 1.3 percent in 2004, similar to estimates made by the White House and St. Louis research firm Macroeconomic Advisers.

"For $350 billion, we're not getting a lot of stimulus to the economy," said Lehman Brothers chief economist Ethan Harris. "This package is not well-designed to bring near-term stimulus."

Some earlier estimates, including one by Congress's Joint Committee on Taxation, thought the bigger tax-cut plans might actually hurt economic growth in later years, in part because higher budget deficits would push interest rates higher.

So will the new plan be better for the economy in the long run, since the tax cuts will be phased out in later years, doing less damage to the budget? Not necessarily.

Some economists worry that the expiration of many of these tax cuts -- and the likelihood that Republicans will come back later and try to make those cuts permanent -- will only make long-term planning more difficult, possibly undercutting their stimulative effects.

"If they wanted to stimulate the economy, they could have cut marginal tax rates, with no [expiration], and then gone home," said Joshua Feinman, chief economist at Deutsche Bank Asset Management. "But they got this idea about reforming the tax code, which may be a legitimate thing to do, but they're reforming it and then turning around and undoing it in three years. It just doesn't make any sense."  Top of page




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