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Tax cuts do work – but only for a while

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The host of tax cuts enacted by Congress and the Bush administration since 2001 have done the economy some good. But not as much good as Republicans sometimes claim, other experts say.

For instance, House Education Committee Chairman Howard McKeon (R) of California credits Republican policies for steady job growth, higher wages, a lower unemployment rate, and cutting the budget deficit in half.

Here's an attempt to sort out a politically controversial topic.

Faced with a recession, a large federal budget surplus, and an already loose monetary policy, Republican lawmakers in 2001 did what any new regime would probably have done under the circumstances to prevent the economy from slumping further: They cut taxes.

The 2001 tax cuts "provided a short-term boost" to the economy, says Alan Viard, an economist at the moderately conservative American Enterprise Institute in Washington, D.C. By leaving more money in the hands of consumers and businesses, the cuts stimulated demand for goods and services.

But those initial cuts – as well as later tax-relief measures that lowered individual income-tax rates, estate taxes, and taxes on capital gains and dividends – also sparked criticism. Liberal economists chastised Republicans because the bulk of tax savings went to the well-to-do.

"The tax cuts worked for their primary purpose – to shift money upwards to people with a lot of money," charges John Schmitt, an economist with the Center for Economic and Policy Research, a liberal Washington think tank.

Aside from the issue of fairness, Mr. Schmitt says the cuts were inefficient. Millionaires spend some of their tax savings, but they spend proportionately less of them than do those in the bottom two-thirds of the income ladder, Schmitt notes. A one-time tax credit worth $300 to $500 for all taxpayers would have given a bigger bang for the lost revenue buck, he says.

Supply-side economists, influential in Republican circles, maintained that the tax cuts would stimulate savings and job-creating investment, and thus boost economic growth over time.

But critics say that the recovery since 2001 has been weaker than usual. "It's the worst performance in growth of any [business] cycle since 1961," says Paul Kasriel, economic research director at Northern Trust Co., in Chicago.

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