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Booster Shot

Will President Bush's $1.6 trillion tax cut plan boost the slowing economy? Gwen Ifill discusses the issue with four economists.

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  • GWEN IFILL:

    For more on the debate over tax cuts, we are joined by Maya MacGuineas, a fellow with the New America Foundation, a public policy think tank in Washington; Caroline Baum, economics columnist with Bloomberg News Service; Stan Collender, managing director of the federal budget consulting group at Fleishman-Hillard, a public affairs firm; and Kenneth Kies, managing partner at Price Waterhouse Coopers, an accounting and management consulting firm.

    Stan Collender, how much has the state of the economy changed the central debate about tax cuts? The President was talking about tax cuts on the campaign trail; he was talking about tax cuts in his inauguration speech, but now there's a new urgency. Is it the economy?

  • STAN COLLENDER:

    Well, there's an interesting irony here. First the president was talking about the economy turning down and therefore the need for a tax cut. And now continuing downturns, or perceived downturns, falling stock prices have gotten people to think that maybe the Bush tax cut is not exactly what we need, maybe a different tax cut. So clearly the perception has helped the president, at least up to a point. But now there's a little concern his policy is not right for the times.

  • GWEN IFILL:

    You say different tax cut, you mean a tax cut but a bigger tax cut?

  • STAN COLLENDER:

    Or in shorter term – not necessarily something where the biggest benefits would be in the last three years.

  • GWEN IFILL:

    Ken Kies, what do you think about that, is it the economy that's changed this debate?

  • KENNETH KIES:

    I think the economy has given a little boost to the president in terms of the urgency of enacting it, but in terms of changing the shape of it, I think the only impact it's really had is given incentive to move some of cut up to the earlier years, rather than the later years. But the basic outline of the proposal I think remains probably what it was when he proposed it on the campaign trail.

  • GWEN IFILL:

    Is it a reasonable outline, that basic outline?

  • KENNETH KIES:

    I think it's a good balance because on the one hand he's cutting taxes for income taxpayers at the lower end; the creation of the 10 percent rate bracket would cut taxes by $383 billion, that's a big piece of it. And that would largely go into consumption. Then he's cutting taxes at the upper end, and frankly the people at the upper end are the ones that created these surpluses, because the '93 tax increase fell almost 100 percent on the top 1 percent or 5 percent of income taxpayers.

  • GWEN IFILL:

    How about that, Ms. MacGuineas, assuming the argument is not now whether there should be one, but when and how big it should be, what's the right policy approach?

  • MAYA MacGUINEAS:

    I think what's interesting is what's changed more than the economy is expectations. The stock market was anticipating a cut by the Fed beyond what we saw and reacted negatively. Now we have the same thing with the fiscal stimulus. In fact, when George Bush was running for president, wasn't excited about tax cuts, but we've been hearing about tax cuts so long and the Democrats have come so much closer to the Republicans that now it's pretty much a done deal, we're just quibbling over difference in size. What we have come to expect now is there will be a fiscal stimulus, sort of cast aside has been the argument that perhaps monetary policy is a better way to approach the slowdown and it's become the conventional wisdom that we need a stimulus. So I think pretty much the only thing both parties are agreeing on now is we will have a fiscal stimulus and pretty much they're agreeing on the size.

  • GWEN IFILL:

    Caroline Baum, what should be that fiscal stimulus in your opinion?

  • CAROLINE BAUM:

    Well, actually, I think the economic situation is sort of muddled the idea. The Republicans were trying to sell a tax cut on structural reasons, and of course our elected representatives are doing our bidding in Washington. As the promo up to this segment featured, they hear about the layoffs and they hear about everything bad and the stock market going down, the truth is a lot of these layoffs never happened, they happen by attrition, they happen overseas and, you know, I agree that the short-term financial management of the economy should be left to the Federal Reserve. On that score, they've cut rates 150 bases points in the first quarter, which for the Greenspan Fed is the most aggressive ever. And despite all the whining on Wall Street, we've got rapid growth in the money supply. I think in a best of all possible worlds you would have a structural tax cut that creates incentives, that could be front-loaded and you would leave the short-term management to the Federal Reserve.

  • GWEN IFILL:

    Are you challenging the basic premise behind all of this, and that's that the economy is stumbling enough that it needs some sort of booster shot, you don't think that's true at all?

  • CAROLINE BAUM:

    Well, I think it does need a booster shot. We've come from 6 percent growth to 1 percent growth. Normally a swing of 500 bases points is something we experience in a recession. I think there's a lot of hype going on, that the fundamentals of the U.S. economy, which six months ago were the envy of the world, have not changed. We've got a flexible job market, an unregulated economy, strong job growth, and I think people should just relax a little. There's nothing wrong with front-loading the tax cut, but I think President Bush should really keep in mind, and Congress as well, that, you know short-term fiscal stimulus is here today, gone tomorrow, and it usually happens at the wrong time.

  • GWEN IFILL:

    How about that, Stan?

  • STAN COLLENDER:

    She's exactly right. The problem with this tax cut, almost no matter which one you get is that it's not likely to really have an effect until the fall, no matter which one we talk about, whether it's a Democrat or the White House plan.

  • GWEN IFILL:

    We heard the Democrats say you'll get $300 back in your pocket tomorrow if they pass this.

  • STAN COLLENDER:

    If they passed it today, it would still take four to six weeks, I would think, before they could the implementation of it. Caroline is exactly right, the Federal Reserve, which is much more important to the economy now than it's ever been, has the ability to act quicker — have a much faster impact. Interest rates are far more important now to the economy than they've ever been before.

  • GWEN IFILL:

    So, Ken Kies, is this the way to do it, to cut individual tax rates? Assuming that a stimulus is needed of some kind, that the right approach, or should we sit back and let the Fed handle it?

  • KENNETH KIES:

    I think the Fed has a role here, but I think we're losing sight of the business side of the equation. One of the reasons that the economy is slipping is that in the first half of 2000 business investment was way up, the second half of 2000 it went through the floor. We should be thinking about some tax reduction going to the corporate sector, because that's where jobs get created. There's a lot of discussion about the single mother that's making $24,000 a year getting a tax cut, but we should also think about getting her a better job – and so part of the approach to this should be trying to direct some of this tax reduction to the corporate side at the same time.

  • GWEN IFILL:

    As you probably know, the corporate side has been hanging back here, allowing the president to make his push for the middle class tax cuts. Do you anticipate there's going to be a sudden lobbying effort that's going to begin from the corporate side?

  • KENNETH KIES:

    I don't think you're going to see a sudden lobbying effort, but there's been a lot of discussion on Capitol Hill both by members and representatives of the business community that this is part of the equation that needs to be thought through. The president does have some major corporate provisions in his plan. The research and development credit would be made permanent, costs $47 billion over ten years, there are provisions impacting the financial services sector as well. So they haven't completely ignored the business side, even though the primary focus has been the individual side.

  • GWEN IFILL:

    How about that, Ms. MacGuineas, is that maybe a way to get the economy jump started – to go for the corporate tax cuts instead of the individual?

  • MAYA MacGUINEAS:

    In fact, I would say that monetary policy could help the business investment side as well. I think what we have now is we have our back up against the wall where both monetary policy and a fiscal stimulus will both be necessary just because they been talked about. This is not a recession. This is a downturn that's about consumer confidence, which we saw has just gone up, but would come back down if either the markets or taxpayers didn't receive what they were promised. But I'm not sure that the economy is indicating we need either of these things so drastically, in that economic growth is still positive, we have seen layoffs, but as was mentioned before, a lot of it is do to attrition, because of the tight labor market, these people are getting scooped up very quickly, and unemployment is still, the numbers are still very good. Finally inflation is good.

    We do have plenty of room for the Fed to move around as monetary policy is necessary. I think what we've seen is a reasonable correction. We saw a stock market correction that people are quickly assuming means there is an economic downturn. But I think we're seeing a rational stock market correction. The only difference this time is that we have many more investors, small time investors, than we used to, and their response is sort of the reverse wealth effect, whereas, as they're watching their 401-k accounts decline, against which they have borrowed against substantially, they feel they need to slow their spending. Part of the stimulus is to make sure any slowing of spending is done very gradually – back to the glide path – or the soft landing.

  • GWEN IFILL:

    Caroline Baum, let's assume for the moment that the political rush on tax cuts is so attractive that people can't resist it. Exactly how should this happen? Should it happen, what will happen to the money, if for instance, $300 ends up in our pockets in two months, does it go to savings, does it go to stimulating other spending? Where does the money go?

  • CAROLINE BAUM:

    Well, the good news is that Americans have a very high marginal propensity to spend. Yes, especially the lower income classes, if you give money back they will spend it. Some of that is by necessity; they can't afford to save. That's why I think they need to keep their eye on the ball. We do need tax relief. We need cuts in marginal rates, capital gains cuts. This is the kind of thing where the short-term thinking is really not working to the advantage. The statistic you hear tossed around a lot that tax revenues as a share of Gross Domestic Product, the highest they've been in half a century. I mean, this means that Washington is controlling more resources and that that means a less efficient economy.

    Of course, Washington is not known for long-term thinking, and if you can give a short-term fix, why not? So I would much prefer that we start to see some better news on the economy, which might again put politicians back in long-term thinking mode. I'm not against tax relief. Any time the government wants to let you keep more of your money I'm for it in any way, shape or form.

  • GWEN IFILL:

    So assume the government allows you to keep that government, Miss Baum, does that automatically translate into a stimulus when you give it back to people and they spend it?

  • CAROLINE BAUM:

    Rebates, what's on the table now, translates into direct immediate spending. Things in cuts like marginal rates, cuts in capital gains rates are term supply side tax cuts. They create incentives. If you allow an employee to keep more of his paycheck, you're going to force more people into– the more incentive to work. It creates incentives to save and invest. So what that does is increase the economy's potential — its ability to grow without creating inflation.

  • GWEN IFILL:

    Today, Stan Collender, Larry Lindsey yesterday, the President's national economic advisor, suggested that a part of the president's tax cut plan, the estate tax would not be repealed this year but maybe in a couple of more years. Does that effect the outcome or the way the numbers add up on this plan?

  • STAN COLLENDER:

    Well, it will change some of the distribution tables. It may change it so that a slightly higher percentage of lower income people take advantage or get a benefit here, but it's not going to change the debate that much. It moves a very small part of the overall plan.

  • GWEN IFILL:

    Does it change the politics of the debate?

  • STAN COLLENDER:

    Just marginally. I mean, the bigger question now is what is the right thing to do. And, given this kind of environment, should — no one is sure what the environment is – as I think you're hearing us talk about. And no one is talking about the value of paying down more federal debt as soon as possible putting downward pressure on interest rates. In a lot of ways that could be the best thing you could do for someone who owns a home – let them refinance and they could probably save more per month than any tax cut.

  • GWEN IFILL:

    What's happened to the debate about paying down the debt?

  • KENNETH KIES:

    Well, there's going to be a big part of the debt paid down. That's part of the president's proposal. I think it's kind of important to put the size of the president's tax cut in proportion. It's $1.6 trillion, which would be a 5.8 percent tax cut over the next ten years, because the federal government is going to raise $28 trillion in the next ten years with no cut at all. So the president's proposal is pay down some of the debt, give people a tax cut and make some spending increases. I actually think the president has a balanced proposal. One thing about this rebate that everybody should understand is this was tried once. Jimmy Carter had this idea and the IRS finally told them it would be such a nightmare to get the checks out. Can you imagine that we're going to do this at the time of the filing season, turn to the IRS and say, by the way, would you also write 110 million checks while your collecting all the returns? Practically speaking, this has got a lot of logistical problems with it.

  • GWEN IFILL:

    Impractical?

  • MAYA MacGUINEAS:

    I think the rebate is probably really difficult to administer. What I'd like to do is go back to some of the numbers you were talking about and put them in a different perspective. We're talking about surpluses of $1.6 trillion as though suddenly the United States is so wealthy what are all the things that we can do with this money. You brought up paying down the debt. Well, what the trustees of Social Security and Medicare were telling us last week is that we have unfunded liabilities that dwarf the surplus that we are talking about. We have the trustees look at these programs for 75 years, because they're intergenerational programs, and we have a difference in how much money is going into the programs and how much is going out of $450 trillion over the next 75 years. That's almost half a quadrillion – I think that's what comes after trillion.

  • GWEN IFILL:

    So a tax cut is–

  • MAYA MacGUINEAS:

    Well, I just think we're acting as though we have so much extra money, and we're talking about, yes, we should certainly have tax cuts – and I feel somewhat Grinch-like suggesting this, but I think we should be talking about how to reform these programs, and the answer, as we know, is to increase savings, which comes from paying down the debt. But we quickly run into this problem that the government is going to run out of debt, which can be repurchased, and since many people think that it would be unfortunate for the government to acquire private assets, I think we need to stimulate personal savings, which is the same as paying down the debt in the economic effects. But we really need to find ways — whether it's tax reform or private savings accounts, but I would talk about using the surplus to stimulate savings.

  • GWEN IFILL:

    Caroline Baum, what do you make of that?

  • CAROLINE BAUM:

    Well I think debt reduction has sort of become an end in itself. The only way to fix Social Security is to privatize it. It's a demographic issue. Unless we're going to increase the birthrate substantially, we've got fewer working people that need to support an increasingly large number of retirees. If someone like Alan Greenspan is so worried about paying down all publicly held debt by 2006, I've got an idea for him. I think that we should use the excess surplus to create private Social Security accounts that individuals can then add to. I mean, this is a time bomb, you know, but I don't know that paying down the debt– yes, it will lower the burden on government interest rates in later years when it's tapped by the retirement counts, but I don't think it's the most efficient way to solve the problem.

  • GWEN IFILL:

    Okay. Well, you've just taken us into an entirely separate debate which we will have the next time we all gather. Thank you all very much.

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