June 4 , 2003
The first rebate checks for those eligible to receive a
child tax credit in the past tax year already are running off the government
printing presses. The amount, up to
$400 per child under 17 in an eligible household, will be welcome to many
relatively low income households.
Withholding tables probably will be altered to reflect the
new tax brackets by the July paycheck. As
a result, all workers will appear to receive a raise.
Also, taxes on dividend income and long term capital gains
transactions after early May will be reduced for this tax year and for several
In total, taxes will decline at an annualized rate of
almost $70 billion per year for the next several years. Will this be enough to jump start an economy that has lost
more than 500,000 jobs so far this year and more than two million since the
recession began in March 2001?
Certainly, such tax reductions in an environment of falling
interest rates will stimulate the economy.
(Remember, this is borrowed money, as spending was not cut to finance the
tax cuts. Even in tax cuts, there
is no such thing as a free lunch, no matter how hard some White House economists
try to argue otherwise.)
However, will it stimulate the economy enough to restore
solid economic growth and job creation?
I have already argued in a previous column that
"internal dynamics" are laying the foundation for economic expansion.
A more competitive dollar has added to those positive economic
developments (although with some risks). Nevertheless,
most economists would agree that tax cuts at this time could be very beneficial
to restoring strong economic growth.
Having given the administration its due, there is virtually
no way that these tax cuts will add a million jobs in the next year, as the
President sometimes claims.
That million job estimate was prepared by Glenn Hubbard,
departing Chairman of the Council of Economic Advisors.
He was assuming that the double taxation of dividends would be totally
excluded. He also assumed that
dividend paying stocks would increase in value until the after tax percentage
earnings would be the same in the before and after tax regimes.
Finally, he assumed a remarkably rapid consumer and capital spending
response to increased asset values.
Of course, the double taxation of dividends was pared, but not eliminated. Furthermore, the tax reduction is only certain for four years, not forever. Under such conditions, asset values would only partially adjust to the reduced tax liabilities of its dividends.
Furthermore, some asset prices might actually fall.
Funds available for investing may not grow as much as the asset
appreciation of the dividend paying stocks.
(Indeed, it would be remarkable if they did).
Thus, some reduction in asset prices of growth stocks and tax free
municipals could be expected. These
offsets to the dividend appreciating asset values were not assumed.
Even when tax rates are "permanently" changed on
income earned from investments, asset prices have not fully compensated for the
changes in the past. One reason is
the temporary nature of permanent changes.
Investors remember the 1986 and 1993 marginal tax rate increases that
followed the 1981-1983 tax cuts. They
are not foolish enough to assume that such reversals will not happen again.
In a similar vein, investors cannot separate the tax rate reduction effects from other factors when asset values change. (Even economists struggle with this calculation.) Therefore, they are reluctant to change their consumption and capital spending patterns until favorable asset prices persist.
The stock market surge of the 1990s only began to cut
savings rates and accelerate capital spending after several years of asset price
advances. Any increase in stock
prices as a result of this tax legislation probably will not noticeably change
economic behavior until well after 2004.
To be sure, the reduced capital gains tax treatment will
also enhance asset values, at least after those investors use the lower tax
rates to reallocate appreciated asset positions. As you can see by the way I phrase my response that the
impact of reduced capital gains tax rates on asset values also will not be
immediate, nor large.
So how many jobs can we expect from this tax bill?
The 3 percent reduction in tax collections for prevailing
economic conditions that is contained in this bill will probably add a total of
less than 2 percent to economic growth over the life of the bill for all the
uncertainty reasons cited above. Enhanced
economic growth well short of half a percentage point should be expected from
the bill before the next Presidential elections.
At most the impact will be only a few hundred thousand additional jobs. For those people getting those jobs, that may be enough. For the two million who cannot find a replacement for their last job, they better hope that the falling dollar will deliver the international customers that will begin the rehiring process. This tax bill simply will not deliver the jobs that are being promised.