How Effective Has the Tax Cut Been?

From all indications the economy is not moving forward and all the signs point to a continued recession.

As I discussed in a few volume ago as to the unwise decision to tax cut, it seems that the predictions are coming true.

The tax rebate so far has not worked and the surplus that the Federal Government had is vanished and in fact the Government has to borrow more money to meet the budget deficit.

The National Debt has reached the 6 trillion Dollar threshold which was set by the Congress many years ago and it became law. Now the Bush Administration has to get permission from the Congress to exceed that threshold.

There are many school of thoughts as to why this has happened. The Bush Followers have started to blame it on the September 11 tragedy. The argument is that the attack caused an economic havoc and subsequent slowing down of economic activities. Also the unexpected expenditure by the Federal Government for the security, rescue, and other expenses related September 11, 2001 caused the depletion of the surplus.

So how about the Tax Cut? Wasn’t it supposed to boost the economy?

Their answer would be that due to the September 11, 2001 tragedy, the sudden slow down in economy and loss of consumer confidence, the tax rebate was unable to work as it was planned. Therefore, the blame should be squarely on the September 11 attack.

Although some of the arguments made above may sound reasonable, but there is another argument the could be made and is in fact is being made.

The unnecessary Tax Cut and the tax rebate has caused the government spent its surplus which could have been used for rainy day which September 11, could easily be categorized as a rainy day, in fact it was a stormy day.

Furthermore, since the Tax cut was not targeted properly it failed to have an impact. This is because the high income households do not need to use their tax rebate or tax savings to buy an appliance, a new car, or other durable or consumable items that can increase the manufacturing production and cause an increase in employment.

This group of people may take their tax rebates and savings to invest in the stock market or some other financial portfolio which would increase their wealth. This does not mean a boost in economic activities and will not help to increase employment.

There is no question that the tragedy of September 11 had an impact on the economy, but how much impact is not known yet.

However, despite the immediate negative impact of September 11 on the economy, the long run impact will be positive one, as it has always been with other disasters regardless of its origin ( man made or natural). The destruction must be rebuild and that will only mean more jobs, more purchase of materials which in turn mean more manufacturing and more jobs again. More jobs mean more income tax to be paid to both State and Federal Governments and no unemployment benefit to be paid by both State and Federal Governments. Therefore the Government will benefit in two folds.

The Northridge earthquake helped the California economy, the Hurricanes and floods in other parts of the United States have also helped those economies. The tragedy of September 11 is no exception. The state of New York and the rest of country shall benefit from the rebuild effort and the opportunities that it will bring. Just to make a point in a couple of days after the destruction of the Twin Towers in New York City, the demand for desk top computers was increased sharply and many thousands of desk top computers were sold in a very short time which helped the computer manufacturing industry. The examples would be many.

What is certain is that we have lost a golden opportunity to do some good with the surplus we had. From all indication, we will not have another such opportunity in any time soon.

Even now that over three months have passed from the Tragedy, the economy is still soft despite the lowering of the prime rate by the Federal Reserves, most of the tax rebate checks being mailed, and the government promotion to have people go out and spend money.


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