NCPA - National Center for Policy Analysis

Sustained Economic Stimulation Needed

April 10, 2001

Tax rate reductions are an even better investment in 2001 than they were nearly 40 years ago in 1962.

With the economy headed toward a recession, what is needed at this point, says economist John Makin, is aggressive stimulation through cuts in tax rates.

The U.S. economy was entering an expansion when John F. Kennedy proposed his tax cuts; but he wanted tax reform and sustained economic stimulus from a better-designed tax system.

  • Kennedy proposed tax rate cuts equal to more than 2 percent of Gross Domestic Product (GDP) to stimulate economic growth.
  • At that time, the federal budget deficit was higher than 1 percent of GDP, and federal debt held by the public was 44 percent of GDP.
  • Today, with the economy slowing, the tax rate cuts and a modest fiscal stimulus proposed by President Bush equal barely 1 percentage point of GDP.
  • The ratio of publicly held debt to GDP is 33 percent and falling and the surplus is approaching 3 percent of GDP.
  • When the Kennedy tax cuts were enacted in February 1964, they helped to sustain three years of noninflationary growth averaging 6.6 percent from 1964 through 1966.

Some protest that the proposed tax cuts are too large because they threaten the paydown of federal debt, on the mistaken idea that somehow debt paydown caused the prosperity of the 1990s. In truth, the prosperity of the 1990s caused the debt paydown.

In 2001, negative pressures on the economy justify far more aggressive tax rate reductions -- including moderate budget deficits and an attendant moderate rise in the ratio of debt to GDP.

Source: John H. Makin, "A Primer on Depressions," Economic Outlook. April 2001, American Enterprise Institute, 1150 Seventeenth Street, N.W., Washington, D.C. 20036, (202) 862-5800.

 

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