Sunday, November 13, 2005

Are Tax Cuts Dangereous?

Few things tend to cause as emotive reactions as proposals to cut taxes. Critics are quick to offer predictions of the likely effect ranging from just bad to truly cataclysmic in their negative consequences.

A quick look at the famous Bush tax cuts and the US economy does however pay a somewhat different picture.

It’s often forgotten that when Bush come to power in early 2001 the US economy was in recession.

Since then there has been three waves of tax cuts – the last in 2003 – and a remarkable improvement in the performance of the US economy.

The country has now had 10 consecutive quarters of growth above 3 %, which is the longest period of expansion since the mid-1980’s and clearly better than the Internet- and Clinton-boom years of the 1990’s.

More than 4 million new jobs have been created, and unemployment has dropped below 5 %. It is clearly significantly lower than in countries like France or Sweden.

Productivity has been increasing very fast. During the last quarter reported it increased by more than 4 %. This is happening in spite of no fewer than 12 increases in interest rates, taking them to a level twice the one in the Euro area.

And the federal budget deficit has started to shrink as a result of the rapid growth in tax income.

Last year federal revenues increased by no less than 14 % as a result of the higher growth. Even with the very high rates of increase in federal spending, on present trends the federal budget might well be in balance by 2008.

Could there be a lesson for others in all of this?