The Economic Case Against Bush's Tax Cut

NEW YORK: Washington politicians are worried over signs that America’s great structural boom of the past five years is over: a poorer outlook for profits, increased corporate debts, and a related slowing of business investment in fixed capital, new customers and new employees. If the boom is over, the structural unemployment rate – alias the ‘natural rate,’ or Nairu – will rise to a more normal 4.5 to 5%. Alan Greenspan, chairman of America’s Federal Reserve, can help by avoiding tight money but he cannot undo this structural shift.

What is to be done? Talk in Washington portends a lurch away from the “sound finance” of the 1990s – the increased tax rates and tighter grip on spending that replaced budget deficits with budget surpluses. Republicans propose a massive tax cut while Democrats favor a package of greater spending and a lesser tax cut, but which has the same budgetary cost as the Bush plan. Either plan would blow a huge hole in this year’s surplus. Future surpluses would disappear by the decade’s end, if not sooner.

Several economists object to either course. We agree there may be some welcome effects in both the proposed Republican and Democratic tax cuts. Research – of mine and of others – confirms that changes in personal income tax rates (the largest part of President Bush’s plan) do have an impact on structural unemployment, not just net paychecks. It’s common sense that an income tax cut, in raising after-tax pay rates, boosts employees’ and managers’ incentives, reducing costs and raising profitability – in large part because the returns on workers’ wealth mostly escapes income tax. What is at issue is the justification for the drug of income tax cuts, with its worsening counter-effects and serious side effects.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.

required

Log in

http://prosyn.org/3UUtEze;
  1. Chris J Ratcliffe/Getty Images

    The Brexit Surrender

    European Union leaders meeting in Brussels have given the go-ahead to talks with Britain on post-Brexit trade relations. But, as European Council President Donald Tusk has said, the most difficult challenge – forging a workable deal that secures broad political support on both sides – still lies ahead.

  2. The Great US Tax Debate

    ROBERT J. BARRO vs. JASON FURMAN & LAWRENCE H. SUMMERS on the impact of the GOP tax  overhaul.


    • Congressional Republicans are finalizing a tax-reform package that will reshape the business environment by lowering the corporate-tax rate and overhauling deductions. 

    • But will the plan's far-reaching changes provide the boost to investment and growth that its backers promise?


    ROBERT J. BARRO | How US Corporate Tax Reform Will Boost Growth

    JASON FURMAN & LAWRENCE H. SUMMERS | Robert Barro's Tax Reform Advocacy: A Response

  3. Murdoch's Last Stand?

    Rupert Murdoch’s sale of 21st Century Fox’s entertainment assets to Disney for $66 billion may mark the end of the media mogul’s career, which will long be remembered for its corrosive effect on democratic discourse on both sides of the Atlantic. 

    From enabling the rise of Donald Trump to hacking the telephone of a murdered British schoolgirl, Murdoch’s media empire has staked its success on stoking populist rage.

  4. Bank of England Leon Neal/Getty Images

    The Dangerous Delusion of Price Stability

    Since the hyperinflation of the 1970s, which central banks were right to combat by whatever means necessary, maintaining positive but low inflation has become a monetary-policy obsession. But, because the world economy has changed dramatically since then, central bankers have started to miss the monetary-policy forest for the trees.

  5. Harvard’s Jeffrey Frankel Measures the GOP’s Tax Plan

    Jeffrey Frankel, a professor at Harvard University’s Kennedy School of Government and a former member of President Bill Clinton’s Council of Economic Advisers, outlines the five criteria he uses to judge the efficacy of tax reform efforts. And in his view, the US Republicans’ most recent offering fails miserably.

  6. A box containing viles of human embryonic Stem Cell cultures Sandy Huffaker/Getty Images

    The Holy Grail of Genetic Engineering

    CRISPR-Cas – a gene-editing technique that is far more precise and efficient than any that has come before it – is poised to change the world. But ensuring that those changes are positive – helping to fight tumors and mosquito-borne illnesses, for example – will require scientists to apply the utmost caution.

  7. The Year Ahead 2018

    The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.

    Order now