Wednesday, November 30, 2005

The Bush Tax Cuts---Good Timing

One of the problems with fiscal policy (taxing and spending) at the federal level is that rarely do the policy actions come into play when they are needed. For example in a typical recession, delays by Congress and the Administration in hammering out a tax cut to stimulate the economy, and delays in getting the cut in the hands of the consumer, limit the effectiveness of most tax cuts designed to stimulate the economy.

The last recession, which began in March of 2001 and ended in November of 2001, brought a welcomed contrast. The Bush tax cuts were signed by the President in June of 2001 before most knew that the economy was in a recession. The $1.35 trillion in tax cuts, spread over 10 years, could not have been more perfectly timed. This package of cuts, the largest since 1981, was an important factor that helped end the recession less than 9 months after it began, and was a significant ingredient to the solid economic recovery than ensued.

The National Bureau of Economic Research, the group responsible for designating the beginning and ending of U.S. recessions, did not signify the beginning of the 2001 recession until December of 2001, a month after it had ended. Typically the Congress and President would be expected to pass and implement a tax cut package a full year after the designation of a recession. Despite all the protestations and complaining by political pundits, most economists recognize the contribution of the 2001 tax cuts to the economic recovery that began in December 2001 and is likely to continue into 2006 and beyond. Third quarter 2005 growth (annualized) of over 4.0 percent is a testament to the proper timing and magnitude of the 2001 Bush tax cuts.


No comments: