Tax Cuts Provide Partial Boost For US Economy

by Leroy Baker, Tax-News.com, New York

21 October 2003

Although many economists remain unconvinced as to the long term impact of President Bush's $350 billion tax cut package, signed into law last May, economic data from the last few months appears to suggest that the tax cuts have indeed jolted the US economy.

Reports show that since the new tax laws came into effect, consumer spending jumped 12% on an annualized basis during the months of July and August, accompanied by a small rise in business investment activity and manufacturing output. As a result of this summer spending spree by American consumers, economists have calculated that the economy grew by 6% (annualized) in the third quarter.

Edward McKelvey, an economist at investment bank Goldman Sachs and according to the New York Times, a previous tax cut skeptic, told the paper that the stimulus package has played a central part in the resuscitation of the economy in recent months. He estimated that as much as three-quarters of their summer tax relief was spent by US consumers.

However, the positive figures are far from being conclusive evidence that the recent bounce in consumer spending was down to the tax cuts, and many believe that the low level of interest rates could just as easily be the main reason for higher levels of spending.

Joel Slemrod, director of the Office of Tax Policy Research at the University of Michigan suggested that consumer spending will follow a similar pattern as that seen after the 2001 tax cuts, when Americans spent about one third of the tax relief received that year. "The preliminary evidence suggests that the marginal propensity to consume is about the same this time,'' he told the NY Times.

Although the tax cuts have undoubtedly had some impact on the US economy, the question now is whether the momentum can be sustained. Worryingly for the Bush administration, figures released by the Commerce Department revealed that retail sales dipped 0.2% in August. Despite the fact that this is a relatively small blip, it may be enough for many to suggest that the summer feel-good factor is already on the wane.

Recommended