Tax cuts prove their lasting economic impact.THE recent slate of economic news has sent the bears into hiding. But it hasn't curtailed the flow of analyses predicting the stimulus from tax cuts is about to fade (this from the same folks who said tax cuts wouldn't work in the first place). If you believe what you read, tax cuts have no staying power, no behavior-changing incentives, no thrust past the initial first-round effect. But tax cuts aren't a one-time event. Even if they're pure handouts, with no supply-side incentives--tax cuts that "put money in the pockets of the people who will spend it"--there's a multiplier effect Multiplier Effect The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold on reserves. . Spending becomes income becomes spending, and so on. "We have the effects of the tax cuts extending out three years," says Bob DiClemente, chief U.S. economist at Citigroup Inc. DiClemente says it's important to differentiate between the demand-side and supply-side effects. On the demand side, "to say the effect is fleeting is to ignore the multiplier effect," he says. "The supply-side effects, while not great, are continual to the extent they are perceived to be permanent." The supply-side effects have to do with the tendency of certain tax cuts, such as cuts in marginal and capital-gains tax rates, to increase the incentive to work, save and invest. In so doing, they raise the economy's potential growth rate. For supply-siders, these are the only kind of tax cuts that matter. It's all about increasing the size of the pie, not apportioning ap·por·tion tr.v. ap·por·tioned, ap·por·tion·ing, ap·por·tions To divide and assign according to a plan; allot: "The tendency persists to apportion blame as suits the circumstances" the various slices. The latest tax-cut package, passed in May, was essentially designed to create long-term incentives rather than short-term stimulus, although there was some of the latter in there, too. The package accelerated the reduction in marginal tax rates Marginal Tax Rate The amount of tax paid on an additional dollar of income. As income rises, so does the tax rate. Notes: Many believe this discourages business investment because you are taking away the incentive to work harder. , enacted in 200l, and made them retroactive Having reference to things that happened in the past, prior to the occurrence of the act in question. A retroactive or retrospective law is one that takes away or impairs vested rights acquired under existing laws, creates new obligations, imposes new duties, or attaches a to Jan. 1, 2003, and reduced taxes on dividends and capital gains to a maximum of 15 percent. Monetarists view tax cuts in a different light--in terms of their effect on the money supply. Tax cuts increase the deficit, at least in the short run (whether supply-side tax cuts eventually pay for themselves is a proposition that exists on Art Laffer's cocktail cocktail, short mixed drink originating in the United States and served as an appetizer. It generally has a basis of gin, whisky, rum, or brandy combined with vermouth or fruit juices and often flavored with bitters or grenadine. napkin napkin See Sanitary napkin. ), causing the government to borrow more. "If the central bank holds the overnight rate steady, it will lead to more rapid money growth," says Bob Laurent, professor of economics and finance at the Illinois Institute of Technology's Stuart School of Business IIT Stuart School of Business (often just Stuart') is an academic unit of the Illinois Institute of Technology, a private Ph.D.-granting research university. IIT Stuart provides teaching and directs research in the fields of finance, technology, information management and . "To the extent that the government's demand for credit is supplied by banks, it means a permanent increase in money." There isn't much evidence to support the idea that the effect of last year's tax cut will be fading fading fading skin coloring. See Arabian fading syndrome (below). Declining in body condition, general health, activity and productivity. Arabian fading syndrome general health is unimpaired. anytime soon. In the meantime Adv. 1. in the meantime - during the intervening time; "meanwhile I will not think about the problem"; "meantime he was attentive to his other interests"; "in the meantime the police were notified" meantime, meanwhile , other forces have been set in motion. Increased spending has spilled over to profits, investment and hiring, which is the route to a self-sustaining expansion. That's already happening. The Commerce Department's measure of profits from current production rose 30 percent in the third quarter from a year earlier. Business investment in equipment and software rose 18.4 percent last quarter, the biggest increase in almost five years. The economy added jobs for the third consecutive month in October. More and more economists are reconsidering their forecast for a "slow" fourth quarter to something on the order of 5 percent. Readings of 62.8 on the Institute for Supply Management's November manufacturing index have typically been associated with multiquarter booms. "At this point," says DiClemente, "we should hope the fiscal stimulus begins to fade." Caroline Baum is a columnist columnist, the writer of an essay appearing regularly in a newspaper or periodical, usually under a constant heading. Although originally humorous, the column in many cases has supplanted the editorial for authoritative opinions on world problems. for Bloomberg News. |
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