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Are More Tax Cuts Needed? - Not Exactly
Subject Tax Cuts
Topic Fiscal Policy
Key Words Tax Cuts, Budget Deficit, Recession, Interest Rates
News Story

The weakness of the U.S. economy has prompted some Republican leaders and President Bush to suggest additional tax cuts to stimulate the economy. The president has mentioned reducing corporate income tax rates and several Republicans have advocated cutting the capital gains tax. Both Alan Greenspan, chairman of the Federal Reserve, and Robert E. Rubin, former treasury secretary, testified before the senate Finance Committee that they were not in favor of these proposals. These tax cuts, Mr. Rubin argued, would not provide the needed stimulus in a timely manner.

The economic news continues to show signs of a worsening economy. Consumer confidence has registered its sharpest decline since the last recession. Retail sales and sales of new homes has fallen. New estimates suggest that 100,000 people in New York alone may lose their jobs, and nationally the airline and travel industries are implementing large layoffs. Faced with a worsening economy, both parties in Congress are considering other policies.

The Federal Reserve has lowered interest rates eight times this year and is expected to do so once again at its October meeting. A tax cut was signed into law earlier this year and tax rebate checks have been distributed to most taxpayers. The $40 billion in emergency spending that Congress passed right after the terrorist attacks, and a $15 billion package to assist the airline industry and bolster airport security, will also provide needed stimulus.

Mr. Greenspan urged caution on the part of Congress. He believes that stimulus measures already put into effect may be sufficient, and that additional measures would have to be sizeable in order to provide needed relief quickly. If additional tax cuts were adopted and were not temporary, financial markets, worried about the fiscal health of the government, might react by raising long-term interest rates. The impact of higher interest rates would negate any beneficial effect of the tax cuts. However, House majority leader, Dick Armey, said that a capital gains tax cut and reduced corporate income taxes were still under consideration.


(Updated November 1, 2001)

Questions
1. Mr. Greenspan advised Congress to go slow when proposing new measures to stimulate the economy. Why did Mr. Greenspan take this position?
2. Mr. Rubin told Congress that additional tax reductions, if they were large, might lead financial markets to raise long-term interest rates. How would tax cuts possibly cause interest rates to rise?
3. President Bush is considering recommending a permanent decrease in corporate income taxes. How would such a decrease stimulate the economy?
Source Richard W. Stevenson, "Strong Opposition," The New York Times, September 26, 2001.

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