Magazine article Insight on the News

Will Pennies from Heaven Reinvigorate the Economy?

Magazine article Insight on the News

Will Pennies from Heaven Reinvigorate the Economy?

Article excerpt

Having finally passed the biggest tax cut since the Reagan era, politicians and economists now are debating belatedly when Americans can expect to see an improvement in the sluggish U.S. economy.

The more optimistic -- including Bush administration officials who sold the phased-in tax cut as a recession-beating measure -- maintain that an improvement will be noticeable sometime this summer. Treasury Secretary Paul O'Neill, who apparently has overcome his initial skepticism of the reviving effects of tax cuts, hopes that September will be the golden month.

The treasury secretary now says a reduced tax burden should boost economic growth. "The effect of this change could be a half a percentage point incremental ... rate of growth going forward in time because of the re-flow effects, the dynamic effect of what this will mean for savings and investment and consumption."

And the more bullish among investment bankers claim that the boost could be even more significant. Deutsche Banc Alex. Brown argues that the cut in income-tax rates that becomes effective July 1 is likely to add about 1.2 percentage points to the third-quarter growth rate and 0.7 percent to the rate for the final three months of the year.

But most economists are more cautious, maintaining that the series of cuts in interest rates by the Federal Reserve will be more important in reviving the economy. Before the tax cuts were enacted, most forecasters had predicted that growth would increase modestly in the second half of the year and accelerate into 2002 as a result of the Fed interventions. …

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