Economy Up Despite Clinton Tax Package
EVEN the title of the report by the Republicans on the Joint Economic Committee (JEC) of Congress last summer sounded grim: ``The Making of an Economic Casualty.'' After describing the Clinton fiscal package passed by Congress as ``one of the largest and most damaging tax increases in history,'' the report added: ``Given the fragile state of the economy, this tax increase may well tip the economy into a recession.''
The report looks alarmist today. Commerce Department statistics to be released late next week will show a real annual growth rate for the economy exceeding 5 percent in the last quarter of 1993, many economists reckon.
Some slowdown in the economic pace is anticipated this year, a forecast influenced partially by the economic experience a year ago. Gross domestic product grew at a seasonally adjusted, real annual rate of 5.8 percent in the fourth quarter of 1992 and then dropped to a 0.8 percent rate in the first quarter of 1993.
The consensus of 50 economists surveyed by Blue Chip Economic Indicators in Sedona, Ariz. is that the economy will grow 3 percent in real terms this year, a slight improvement from 1993.
``The art of forecasting is certainly an inexact science,'' says Stephen Moore, an author of the JEC report and now the director of fiscal studies, Cato Institute, Washington. Although no longer talking of a recession, Mr. Moore does anticipate a slowdown in the economy this year and perhaps ``somewhat of an April surprise when high-income people figure out their tax bill.''
Lacy Hunt, chief economist of Carroll McEntee & McGinley in New York, expects the impact of the Clinton tax increases on disposable income - what individuals have after taxes - to start small early this year and increase over time.
``During the first week of the new year, American households suddenly became liable for $500 million in additional income taxes, or $26 billion at an annual rate,'' he writes. ``In addition, on the April 15th tax date, households will be required to make retroactive tax payments, worth one-third of the increase in last year's tax liability. This will lift the total personal tax bill to approximately $34.5 billion. Finally, tacking on ... $8 billion in new corporate tax liabilities, the total value of these taxes adds up to a drain of $42.5 billion from the private economy.''
Curiously, Moore calculates that the drop in the price of oil is equivalent to a $50 billion tax cut for consumers. So it more than offsets the tax increases, which mostly hit the well-to-do.
Henry Kaufman, a Wall Street economist, figures the tax hikes will have only ``a marginal retarding impact, especially in the first quarter of the year when you see withholding go up.''
And Leif Olsen, a New Canaan, Conn., economist and money manager, holds that much of the affect on the economy occurred last year, as high-income individuals made adjustments in their savings and spending in anticipation of the tax changes. He predicts 3 percent ``or higher'' real growth this year.
Several factors are boosting economic prospects for 1994.
Moore points to passage of the North American Free Trade Agreement and the success of the Uruguay round of world trade talks. He also sees economic recovery in Europe and Japan.
Dr. Kaufman says consumers will be less concerned about corporate layoffs as these diminish during the year. And banks, corporations, and individuals are in far better financial shape than they were a year or two ago, he adds. Many homeowners have reduced their mortgage costs. Long-term interest rates have come down from 7.7 percent when Clinton took over the White House to 6.3 percent - ``a big move,'' Kaufman says.
Individuals, Mr. Olsen notes, are enjoying increases in income and net worth. ``The economy has already performed a lot better than predicted by those people who worried about the tax increases,'' he says.
The minority JEC report speculated that even a minor slowdown in the economy would wipe out half the deficit reduction claimed by the Clinton administration for its fiscal package.
Most economists, however, anticipate a good 1994. Cynthia Latta, an economist with DRI/McGraw-Hill, a Lexington, Mass., consulting firm, estimates that the federal deficit will drop from $254.7 billion in the fiscal year which ended last Sept. 30 to $223.4 billion in fiscal 1994 and $186.5 billion in 1995.