Still waiting for the tax-cut boost

The US economy has nearly stalled four years after several major tax breaks took effect.

By David R. Francis

from the June 25, 2007 edition

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Economist Paul Kasriel is still twiddling his thumbs, waiting for the predicted good results in the economy from the major tax cuts of 2001 and 2003.

In an analysis a month ago for his bank, Northern Trust Co. in Chicago, he referred to the famous Samuel Beckett play, "Waiting for Godot," in which Godot never shows up.

Last week, Mr. Kasriel said he still can't detect the promised big boost in national output, investment, and savings from what economists call "supply side" tax cuts made by a GOP-led Congress and approved by President Bush.

"The data don't seem to support the hypothesis," he said in an interview.

Kasriel will be watching Friday's gross domestic product (GDP) report to see if the nation's output of goods and services in the first quarter is revised upward. In May, the Commerce Department reported that GDP rose at an annual rate of 0.6 percent after inflation, the worst three-month showing in more than four years.

With a recession under way at the start of this decade, the Republican leadership cut taxes in an attempt to get the economy moving ahead. The cuts were structured to lower marginal tax rates (the rate on the last dollars earned) on wage and salary income, and especially the tax rates on capital income, including capital gains and dividends.

"I don't think you could have ever seen a more scripted supply-side tax cut than under the Bush administration," says Kasriel.

Maybe, he adds, the economy would have performed worse if taxes hadn't been cut. But so far, GDP growth in the current economic recovery has been the slowest of any expansion since 1961. It is even slightly slower than the record-long expansion that began in 1991, during which presidents George H.W. Bush and Bill Clinton raised taxes.

President George W. Bush said in November, "The main reason for our growing economy is that we cut taxes and left more money in the hands of families and workers and small business owners." Kasriel says many factors affect the economy, not just taxes, and other promised benefits of the cuts are hard to find.

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