Stimulate the Economy by Retaining the Tax Cuts

Fort Worth Star-Telegram | Pending a final agreement between competing economic stimulus packages in the U.S.House and Senate, it’s fairly certain that taxpayers will receive a small tax rebate check that lawmakers hope will give a lagging economy some spark.

Although this one-time rebate could give economic growth a gentle poke, Congress must make a larger commitment to tax relief if it is to save the nation from recession and job loss. If legislators take the issue seriously, their to-do list for economic renewal should start with making the current tax rates for capital gains and dividends permanent.

Making the cuts permanent and preventing what would be a crippling tax increase would remove unease about the economy’s future, rebuild investor confidence and preserve a key component of the post-2001 recovery.

Allen Sinai, the chief global economist at Decision Economics, finds that the 2001-04 tax cuts for individuals, capital gains, dividends and business sparked economic growth despite events that otherwise would have driven down expansion, such as the terrorist attacks of Sept.11, costly wars in Afghanistan and Iraq, the devastation of Hurricane Katrina and sharply higher prices for gasoline and crude oil.

Those factors should have contributed to an overall economic slowdown, but the five tax cuts of those years sparked growth in real GDP at a rate of 3.2 percent per annum.Average GDP grew at 1.6 percent from 2001 to 2003, increasing to an average of 3.2 percent from 2003 to 2006.

It is no coincidence that those surges in growth followed cuts in capital gains and dividend taxes.Although easier monetary policy, federal spending increases and globalization also contributed to the post-2001 recovery, tax cuts were responsible
for the majority of the increase in jobs and economic growth.

What’s even more interesting is Sinai’s projections of our economy had taxes not been cut.

Using his “Sinai-Boston Large-Scale Quarterly Macroeconometric Model,” one of the largest, most accurate models of the U.S. economy and financial markets, he finds that growth in the gross domestic product would have been 0.7 less each year, while unemployment would have been 1.2 points higher between 2001 and 2006 than it was without the tax cuts and spending increases.

Those might seem like dry, cold numbers, but they represent large numbers of Americans who found jobs and higher incomes that wouldn’t have existed without the 2001-04 tax cuts — and who risk losing those jobs if the cuts aren’t made permanent.

Unfortunately, some leading presidential candidates are trumpeting their opposition to the cuts in the hopes of sounding a populist “us vs.them ” message.

What they don’t tell their supporters, however, is those cuts in capital gain and dividend taxes directly benefit workers’ retirement accounts, create more jobs and allow companies to earn higher profits that have lead to bigger paychecks for workers.

Sinai’s research finds that after years of growing wealth inequality — what some call “the rich getting richer and the poor getting poorer” — the 2001-04 tax cuts sparked a turnaround as workers’ real wages began to catch up.

Real income per capita grew from $25, 698 in 2001 to $28, 135 in 2006 — a $2, 437 per-person explosion in just five years.Greater job opportunities and a more competitive marketplace for labor, spurred by the tax cuts, played more than a small role in that progress for workers.

Although a massive terrorist attack on our financial center, two expensive wars, a natural disaster of biblical proportion and skyrocketing prices for fuel and petroleum would have devastated past economies, reductions in taxes — including those on capital gains and dividend taxes in the post-2001 period — not only fended off economic disaster but sparked robust growth in GDP, created more jobs for Americans at higher pay and drove unemployment down to 4.4 percent.

Repealing that tax relief and raising taxes on capital gains and dividends would drive down growth and drive up unemployment in any economy.Doing so in the face of an impending recession would be like torpedoing a leaking ship.

If Congress is truly committed to economic renewal, providing tax rebates is a good start. But any stimulus package must be bigger.

Congress must pass a stimulus package larger than the 1 percent of GDP proposed by the White House, and closer to the 2 percent to 2.5 percent stimulus like that provided by the 2001-04 tax cuts and spending increases.

Congress would be digging itself into a hole if it were to try to pass a stimulus package while considering repealing past tax relief.

Investors will be wary of putting more money into the economy, and providing Americans with much-needed relief, as long as the threat of restoring higher taxes on capital gains and dividends looms.

Acting now to make the current capital gains and dividend rates permanent should be a key component as policymakers take steps to reinvigorate the American economy.