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How the Boom Began
Tax cuts!


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Rich Lowry

If you find a turtle on top of a fence post, Bill Clinton used to say, it means someone put it there. It was his folksy way to explain why anything good that happened was no accident, and he should get credit.

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George Bush has a fat turtle on top of a fence post in the form of our extraordinarily robust investment-driven economic boom. Not only has he been unable to convince people he put it there, he hasn’t even been able to convince them that the turtle is on the post at all. Attitudes about the economy remain downbeat, even as all the statistical indices point in the right direction.

Perhaps the biggest reason they started pointing that way so determinedly was Bush’s tax cuts of 2003, which cut taxes on capital gains and dividends and expanded expensing for business investment. It is the most obviously effective economic initiative in years. That Bush hasn’t managed to take credit for it is an extraordinary communications failing. It would be a little like FDR not selling the New Deal, or Bill Clinton not persuasively touting his (much overhyped) 1993 tax hike and deficit-reduction package.

The downturn Bush inherited early in his term was driven by an investment bust. Consumer spending wasn’t the problem. Unlike in prior recessions, consumer spending didn’t decline at all, according to a report of the Joint Economic Committee of Congress. In contrast, investment collapsed. The way to revive it was suggested by a simple principle–the more you tax something, the less you get of it, and vice versa. Reducing taxes on capital and investment therefore should increase both, and so it has.

Consider the big picture: The tax cuts were passed in May 2003, and that’s roughly when investment–and everything else–began to take off. According to the Joint Economic Committee, all inflation-adjusted fixed business investment dropped at a nearly 6 percent annual rate from the third quarter of 2000 to the first quarter of 2003, then jumped by 9.2 percent from the second quarter of 2003 to the first quarter of 2006. Investment in equipment and software followed the same trend during the same time period. Meanwhile, the stock market began growing at a faster pace, because taxes were less of a drag on its value.

Economics writer Donald Luskin notes that GDP growth, employment, corporate earnings, new manufacturers’ orders and tax receipts all began booming after the spring of 2003. As he puts it, “Tell people they will get to keep more of the fruits of their labors and the fruits of their investments, and they will labor more and invest more.”

Academic studies are adding specific evidence of the effectiveness of the 2003 tax changes. Part of what the 2003 cuts did was accelerate tax cuts that had been scheduled to phase in more slowly. University of Michigan Economists Christopher House and Matthew Shapiro conclude that “about half of the rebound in GDP in mid-2003 can be attributed to the elimination of the phase-in of the tax cuts.”

In a study in the May issue of The American Economic Review, Alan Auerbach and Kevin Hassett find that the 2003 tax cuts increased particularly the market value of small and entrepreneurial firms.

There has been an increase in dividends–again confirming that taxing something less creates more of it. Raj Chetty and Emmanuel Saez write in The Quarterly Journal of Economics: “An unusually large number of firms initiated or increased regular dividend payments in the year after the reform. As a result, the number of firms paying dividends began to increase in 2003 after a continuous decline for more than two decades.”

One reason Bush hasn’t been able to sell his 2003 tax cuts properly is that, until recently, the Republican Congress had failed to extend them. Now, the GOP is finally pushing their expiration date into the future, from 2008 to 2010. This is the occasion for celebration, and lots of explaining as to how the turtle got on that fence post.

Rich Lowry is author of Legacy: Paying the Price for the Clinton Years.

(c) 2006 King Features Syndicate



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