WASHINGTON — No one likes taxes, but these days war is a bigger concern.
While President Bush kicked off his State of the Union by talking about cutting taxes to stimulate the economy, economists Wednesday said a bigger drag on consumer and business spending was the theme he closed out with — the threat of war with Iraq.
"It’s kind of ironic, despite all the proposals to boost the economy, what’s weighing most on the economy was the second part of the President’s speech: The threat of war," said Frank Badillo, senior retail economist with Retail Forward Inc. "You take that factor away and it would be the most significant stimulus that could be proposed."
In his address to both houses of Congress and other high government officials, the President pressed for passage of $674 billion in tax cuts over 10 years that he said will boost consumer and business incomes and create jobs.
Carl Steidtmann, chief economist with Deloitte Research, said if Bush’s tax cuts were enacted by Congress, they might give the economy a bit of a lift. However, with 2001 tax cuts of $1.3 trillion already working through the economy and low interest rates, he contended, "you look at economic policy right now and it’s already screaming pro-growth.
"What’s dragging the economy is the threat of war and the uncertainty of war," Steidtmann added.
The Federal Reserve seemed to share the assessment that the nation has taken ample steps to stimulate the economy. The Federal Open Market Committee met Wednesday and decided to leave the key Federal funds rate unchanged at 1.25 percent. It said the "accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to an improving economic climate over time."
In his speech, Bush didn’t link the threat of war with the slowdown in the economy.
"Jobs are created when the economy grows. The economy grows when Americans have more money to spend and invest," Bush said. "The best, fairest way to make sure Americans have the money is not to tax away it in the first place."Tracy Mullin, president and chief executive officer of the National Retail Federation, said in a statement: "most" retailers back his tax-cut plan.
The largest part of the President’s tax-cut package, announced earlier this month, calls for dropping most taxes on stock dividends, which White House economists say would inject $300 billion into the economy over 10 years.
For immediate stimulus, Bush said he wants to accelerate income tax cuts already slated for 2004 and 2006 to occur this year, which includes reducing taxes paid by married couples and increasing the child tax credit to $1,000 from $400. The administration figures this acceleration would mean an average savings of $1,083 for 92 million taxpayers.
However, Bush’s tax-cut plan is under fire on Capitol Hill among Democrats and some key Republicans, and is expected to be pared down and recast.
"I don’t know how it all is going to shake out," said Kevin Burke, president and ceo of the American Apparel and Footwear Association, of the tax-cut fight ahead. But he said he expects Bush to be relentless in pressing his position: "The last thing he wants in a Republican-controlled Congress is his own tax program thrown back in his face."
Bush’s proposed tax cuts aren’t "going to be enacted as proposed," said Rosalind Wells, chief economist with the NRF. However, it’s possible parts could be enacted, like increasing the child credit and reducing taxes on married couples, which would mean more money for consumers to spend, she noted.
Mark Levinson, director of policy at UNITE, called the tax-cut proposals "a disgrace, an embarrassment."
"It’s ridiculous," he said. "It’s the old trickle-down economics, throw money at rich people and hope that they’ll invest it. And if we’ve learned anything from experience, it’s that investors will invest if there’s demand for their product and there’s not demand for their products when unemployment for workers and his plan doesn’t do that."
Levinson said the government should consider cutting tax rates for middle-class and poor people, which he said would have a more stimulative effect on the economy.Andrew Hodge, senior vice president at WEFA Group, figures if Bush’s tax cuts were enacted, the GDP would increase by 0.4 percent by year’s end and almost 1 percent next year.
However, Hodge said, "you could construct a scenario" where tax cuts might go too far and with the federal deficit ballooning, interest rates could gradually rise and offset benefits of reduced taxes.
But Hodge said he backs more tax cuts. "It’s worth the risk," he said.
Deloitte Research’s Steidtmann, while arguing tax cuts are good for the economy even if the federal deficit increases, said after the economy recovers tax increases may likely be in the offing to pare down the debt.
It’s clear, with the economy slowing and less money filling U.S. coffers, the budget deficit is growing, the nonpartisan Congressional Budget Office reported Wednesday. The CBO projected deficits of $199 billion this year and $145 billion in 2004 if no new tax cuts or spending increases are enacted. Last year, Bush’s first in office, ended with a $159 billion deficit.
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