Alfred M. Mthimkhulu
He and Al Gore had definitely given Americans and the world a cliff-hanger. Thirty-five days after the election, the world was still in suspense. He too. Then came the day, December 12, 2000. He was relaxing with his wife when someone walked in and asked them to turn on the TV. The Supreme Court was ready with the verdict. There it was, he would be the forty-third President of the United States.
“The centrepiece of my plan was an across-the-board tax cut,” recalls President George W. Bush in his memoirs some ten years later.
“I believed government was taking too much of the people’s money.”
Unfortunately, his Treasury Secretary Paul O’Neill did not share his enthusiasm for tax cuts. In President Bush’s words, the Secretary “belittled the tax cuts”.
Furthermore, the President was not impressed by his lukewarm engagement with the financial community, especially in the weeks after September 11 tragedy when close to two million Americans had lost their jobs. The President couldn’t stand it.
“I decided that a shake-up of the economic team was the best way to signal that my administration was serious about confronting the slowdown affecting everyday Americans. For the change to be credible, it had to be sweeping.”
Swift execution of decisions helps a lot in boosting confidence. Secretary O’Neill was let go and so was the Director of the National Economic Council.
Two years later, the Secretary published his side of the story in a book titled “The price of loyalty: George W. Bush, the White House, and the education of Paul O’Neill” but let’s talk about that some other day. For now, we will focus on the tax cuts President Bush had in mind. What did they entail? Did the plan deliver jobs and growth? Can it work?
First, we must acknowledge that he inherited a budget surplus from President Clinton who had presided over a booming economy.
That was the dot.com era with significant trade surpluses from southeast Asian economies among others. Naturally, the surpluses were invested mainly in the most developed, safe and sophisticated market in the planet, the United States. These inflows kept the dollar stable-to-strong.
In 2004, President Bush renewed Federal Reserve Board Chairman Alan Greenspan’s term. He would be replaced by Ben Bernanke on retirement in 2006.
Thanks to what Ben Bernanke called a “global saving glut” in the low interest rate regime of Chairman Greenspan, the main asset bought by the global savings glut was US properties. As a result, house prices were galloping and mortgage finance was easy to come by.
There was also a rise in property-linked financial products on Wall Street. This property bubble burst in 2007 in what we now know as the global financial crises. That crisis would largely be President Obama’s problem.
Within 150 days in office, President Bush signed the largest tax cut plan in two decades. All tax payers’ marginal tax rates were slashed. The tax-free band was lowered such that five million low-income earners were not taxed. Expenses allowable for deduction in the calculation of tax for individuals such as child tax credit for instance was doubled to $1000.
Estate duty was reduced. There were benefits to small businesses especially from 2002. The measures were followed by further cuts in May 2003 upon which unemployment rates began to fall. For 46 consecutive months, the economy was adding more people into the payroll.
But where was the forgone tax revenue going to come from? In other words, was this plan really working? It surely created a deficit.
His argument, however, was that the deficit would be short-lived such that in the long-term, the growing economy, thanks to the very tax cuts, would more than compensate lost taxes. By keeping a tight budget with resources he had in hand, he reduced the deficit from “3,5 percent of GDP in 2004 to 2,6 percent in 2005, to 1.9 percent in 2006 and to 1,2 percent in 2007”.
Although his Deficit-to-GDP ratio at 2 percent was significantly higher than President Clinton’s of 0,8 percent, it was, in proportion terms, half of Clinton’s two immediate predecessors hence President Bush’s brag that “the average deficit-to-GDP ratio during my administration was 2 percent, below the fifty-year average of 3 percent”.
It worked. Also, the tax cuts arguably averted technology sector driven recession in the early 2000s and rejuvenated the economy after the September 11, 2001 attacks.
Can similar cuts be emulated by countries with a long history of budget deficits, with currencies in free fall, high inflation, high unemployment rates and a very weak industrial output?
Are tax reforms a reasonable proposition for Zimbabwe? This is a healthy debate to have. Somehow, countries such as Zimbabwe must explore alternatives to the well-trodden path of trying to balance budgets by increasing taxes than trying to achieve the very same thing by stimulating growth and savings through tax cuts. Economies recover because citizens have money to spend and invest and are encouraged to take risks.
Tax cuts could be a smarter way of fostering the emergence of such an environment than outright subsidies to transport, energy or lending rates.
◆ Alfred Mthimkulu is a Senior Lecturer, Graduate School of Business, NUST, Email: [email protected], Twitter: @mthimz