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Trusted local news leader for Prescott area communities since 1882
2:18 PM Thu, Nov. 15th

Impetus of tax cut looms large indeed<BR>

WASHINGTON – George W. Bush has signed the third tax cut bill of his presidency, the stock market is moving upward and the clock is ticking toward the 2004 elections.

While Bush's tidy $350 billion economic-stimulus bill isn't as large as it could have been (he wanted $726 billion), there's a lot more punch in this tax cut package than anyone has reported.

Republican leaders reduced much of the package's price tag simply by slicing the effective life span of the tax cuts, knowing that they will get to extend the cuts – or more likely make them permanent – before the decade's end. The cumulative, three-year tax cut stimulus eventually will total at least $1.8 trillion in a $10 trillion-a-year economy, not including a fourth tax cut Bush is likely to propose next year.

The question now is whether Bush's tax cuts will turn the economy around before Democratic campaign strategists start blaming the administration's policies for rising unemployment rates and a mushrooming national debt.

Here's how things are shaping up and where the economy is likely to head over the next seven months, as we move into next year's presidential election.

What works: Past U.S. economies have reacted positively to tax cuts, so there is no reason to believe our current economy won't as well. The tax-rate reductions in the 1960s and 1980s led to faster economic growth and lower unemployment. Stronger growth also boosted federal income tax revenues, which helped produce the budget surpluses.

Despite the success of the Kennedy and Reagan tax cuts – the latter of which helped the economy grow 4 percent per year during the last half of the 1980s – Democrats insist the cuts won't work this time. A much weaker economy is that party's only chance of beating a popular Republican president.

But these tax cuts are going to stimulate this economy, once the payroll-withholding rates begin to drop this month. And don't underestimate the positive impact of the lower capital gains and dividend tax rates, which will drop to 15 percent. This will bring even more investors back into the financial markets, which will raise stocks' values. It will also encourage corporations to offer dividends, which will make stocks an even better investment and bring additional stability to Wall Street.

The economy's strengths: The economy was growing at an anemic 1.9 percent in the first three months of this year, but signs of strength emerge among the bad signals: New and existing home sales have been incredible – April new-home sale numbers were the third-highest in 40 years, according to the Commerce Department; interest rates continue to fall; home mortgage refinancing has put additional money into consumer pockets; oil prices have fallen; inflation is tame and, despite the buzz, deflation seems nowhere in sight.

In addition, consumer confidence, as measured by the Conference Board, is up, which means consumer spending will be stronger in the second half of this year, reflecting fatter paychecks and the wealth effect from increased stock values.

Copyright 2003, United Feature Syndicate, Inc.