According to Martin Feldstein, a Harvard economist, the US is on its way to a recession. The only way to avoid it? Tax and interest rate cuts.
If that sounds like something that the President would have said, you’re half right. Feldstein was an advisor for Bush’s presidential campaign and was instrumental in promoting the President’s tax cut strategy. Feldstein is also a strong advocate for privatizing Social Security.
Economic indicators are not positive, which clearly influenced Feldstein’s remarks. A report from the Institute of Supply Management showing manufacturing activity in decline for the first time in almost a year. The December jobs report marked an increase in unemployment, the highest since 2005.
What kind of relief has the President offered in light of this info? Nothing so far. But it has been widely reported that Bush might promote an accelerated tax credit for taxpayers, a move that Feldstein believes is highly likely. Feldstein also argues that a tax cut is necessary to stimulate the economy, though he has declined to say how much of a cut and for whom.
Speculation is – and yes, I’ll add my name to the mix – that the cut is likely to be tailored to businesses. Business tax cuts are not wildly popular among taxpayers who believe that businesses don’t pay their fair share as is, but in a slowing economy, it’s an easily sale. If that sounds cynical, it is. Congress has been under pressure not to cut taxes on businesses but this is a nice way to present it to the country, you know, the “we’ve got to get this country going” argument. I personally believe that there are other ways to instill confidence in our economy besides giving Wal-Mart and Citibank more tax incentives.
What do you think?
Tax cuts and interest rates? Many ways of doing business are tried and true, and I believe in the “if it isn’t broken, don’t fix it” philosophy, both personal and business. But in personal life , chocolate and roses doesn’t always do it either. New ways have to be found to stimulate interest, for what ever reason or results you want. American economists are among the world’s brightest. But maybe, just maybe new ways, such a whole new approach to taxes and revenue in local, state and national governments is needed. Local governments are needing revenue to operate schools, provide services and utilities. So they always turn to the traditional property tax approach. States need money for infrastructure and services, and they know only sales and gas taxes. In NC, the State has max’d the gas tax to its authorized cap (its tied to wholesale price of gas). As gas prices goes up, so does the amount of tax, therefore the reason NC is 14th in highest gas taxes. Travelers going to FL from the North can avoid stopping in NC for any reason, as VA and SC offer gas cheaper (and the lottery has been a failure so no necessity to stop for that). NC turned to a lottery for more money for education. First that is most stupid, to tie a budget item to a lottery that the income is iffy at best. But it became law, and lo and behold, the expected income was not even 75% received. (And the lottery officials are going to give themselves a raise, for the good job they did). On the Federal side, taxes cut, means less revenue, especially in lean times. But the stimlus always seems another level for business. How many times has the expression was given over the recent holidays, the US economy is consumer driven. Americans don’t save like the Europeans or Japanese. Just give your kids a fiver and see what happens? Nine point nine out of ten spend it all, as soon as possible. Encouragement for consumers to save would help drive interest down for borrowers, but banks being greedy, also drive down interest on savings. Maybe there is were government should say, a minumun should be paid by banks, not scaled to total savings, just a minimum. Say 4%. When I was little chap in Greensboro, my grandparents provided a savings account for me. The interest was 4.5%. Too my parents took in the settlement.
Our country is too smart to keep doing the same old, same old. Some where in this great land is an economist with a grand scheme who should be listened too.
Wow, lots of good topics in this one. I could go on for days. But I won’t…
To stimulate the economy via the federal tax system, my first choice would be something like bonus depreciation, to spur capital spending. I’d love to see it targeted towards smaller businesses, with some form of clawback for companies that have outsourced US jobs, but the devil would be in the details to write that. IMO, the beauty of spurring spending by allowing faster deduction of capital expenditures is that its really just a deferral, not a reduction of tax.
Personally, I thought the individual rebates back in 2001 or whenever were more gimmick then anything, and doubt there was much overall impact to the economy from them.
Dad (I know, I can’t bring myself to call him Wayne, even on the blog), I agree that we need a new approach. The current system is borrowing Peter to pay Paul and requires the states to foot the bill for a lot of mandatory new programs (like No Child Left Behind and new homeland security programs). Expenditures at the federal and state levels are increasing – and that needs to be stopped OR revenues to the government need to increase. Lowering tax revenues – especially for businesses – is not a long term fix.
ATG – Please, go on! I will echo your sentiment about the 2001 “gimmick” – it wasn’t any extra money, just money a little faster. And as someone who was preparing returns then (thank goodness, no more), I can say it was massively confusing. And “extra” that might have boosted the economy went to paying tax professionals to do the returns. While I am pro-tax preparer when necessary (as you know), some simple returns were overly complicated by the advance credit. It was insane.
So how can businesses not being their fair share? I’ll admit to being way to the right on fiscal issues, but I’m always surprised by that argument. Don’t you think taxes at the business level are just passed on to the consumer? If in fact, businesses were not paying their fair share, and a business tax increase were passed, does anyone doubt it would be immediately passed back to the consumer?
Wayne – I agree with many of your points. The last one though…well, maybe I’m pessimistic, but I think there are way too many people making dumb financial decisions, and I just don’t see it changing. I’m amazed when I see cars advertised based on the monthly payment instead of purchase price, but I guess some people go for it. The subprime fiasco sure demonstrates that understanding a document isn’t a prerequisite to signing it. I’d like to see it all change too, and it needs to for the long term financial health of the country, but I’m not very optimistic.