Friday, February 18, 2005

The Success of the 2003 Bush Tax Cuts

William P. Kucewicz on NRO Financial:
"The Bush tax cuts of 2 years ago continue to lay the foundation for a prolonged economic expansion, owing to a conspicuous shift in private expenditures from consumption to investment. The June 2003 tax cuts, in fact, are functioning precisely as promised: boosting GDP to the benefit of all Americans, regardless of income. It's one of the marvels of supply-side fiscal policy. By raising the incentive to invest, marginal tax-rate reductions augment the ratio of financial capital to labor capital, thus raising labor productivity and, in turn, accelerating growth. "

"Democrats, however, aided by a pliant (and largely economically illiterate) Washington press corps, continue to foist the fiction that the Clinton tax hikes produced the 1990s boom by closing the federal budget deficit. This is patent nonsense. For a start, they've got the cause-effect deficit-GDP relationship backwards: The deficit closed because economic growth quickened, not the other way around.GDP growth is clearly more responsive to changes in private investment than personal consumption. Personal consumption expenditures, as a percentage of GDP, have a tendency to rise during economic contractions, while private fixed investment usually shrinks; again confirming the pivotal supply-side role played by investment versus consumption. "

"Truth is, the more after-tax money people have at their disposal, the greater the propensity to save rather than to consume. Much of any increase in real DPI finds its way into nonresidential fixed investment. Increased business investment of course generates further increases in personal income (via enhanced labor productivity and corporate profitability), making even more financing available for business creation and expansion.Lastly, President Bush's envisioned ownership society would stimulate strong and lasting economic expansion. His calls for tax cuts and tax simplification, as well Social Security reform, would enhance the economy's long-term growth prospects by improving the all-important ratio of private investment to personal consumption.In jawboning members of Congress, therefore, the administration's strongest argument for new and permanent tax cuts is that they work. Tax-rate reductions redound to everyone's benefit regardless of income level by raising the incentive to invest and thus accelerating the pace of economic expansion. Yes, a rising tide does lift all boats."

The article is also accompanied with factual quantification and supporting diagrams.

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