Taxing Times

This is a partial transcript from "The Journal Editorial Report," April 15, 2006, that was edited for clarity.

PAUL GIGOT, HOST: The millions of Americans struggling this weekend to decipher their complicated tax forms may find it hard to look on the bright side. But there is plenty of good news when it comes to the economy. With low unemployment and robust growth, business and consumer confidence are high.

So what can be done to keep the good times rolling? Brian Wesbury is the chief economist with First Trust Advisors. He joins me now from Chicago.

Brian, welcome.


GIGOT: Let's talk about taxes. Three years ago we had this debate over tax cuts and 2003 tax cuts — big debate. Three years later, we have a pretty good economy. How crucial do you think those tax cuts have been to this expansion?

WESBURY: Well, I think they've been absolutely crucial. If you really look back, the recovery started in November 2001. But it was a very weak recovery. In fact job growth was declining on average 70,000 jobs per month. Real GDP was only 1.8 percent per year, and business investment was falling. But once the tax cuts were passed in May of 2003, everything turned around. Job growth is now 200,000 a month. The economy is growing 3.5 to 4 percent clip. Business investment is growing at a double-digit rate. And to top it all off, government revenues, tax revenues, are soaring up 10 percent so far this year over last year.

GIGOT: After having risen 15 percent last year.


GIGOT: But a lot of people would say, look this is just the normal business cycle. It was bound to come back. And besides, the real hero here is the Federal Reserve, which has kept money growth pretty expansionary. What is your response to that?

WESBURY: Well, there's lots of people that want to discount the tax cut and say, hey, this is just a normal business cycle. But it's not normal. We had 9/11. We had a stock market crash. We had deflation. And we had huge declines in business investment. And something had to turn that around, literally almost on a dime in May of 2003.

And I think when you look at this, what you sense is that with war, with 9/11, with the stock market crash, the risks for investors had been elevated. And the way you kind of offset that balance is you've raised the rewards. And so by cutting taxes on investment, we raised the after-tax rewards. And that balanced out this risk-reward ratio. And that's when the economy turned around. It's not just a normal recovery.

GIGOT: Well, Robert Reuben and some other critics of Bush economic policies would say, look, whatever the good the tax cuts did then and between 2003 and now, we have this big problem, and it's called the budget deficit.


GIGOT: So now is the time to raise taxes, to reduce that budget deficit, because interest rates are rising. That's fueled by the higher deficits. Take on that Reuben argument.

WESBURY: Yes, well, there is a lot of people that have continually focused on the deficit over the years. Just to kind of think back about the last 25 years, none of the horrible things that were supposed to happen from a deficit ever did. But really when we get down to it, the real issue about the size of the government is not the deficit but how much we spend. And what we've seen in the last few years is that government spending has soared.

Now what's great is that in the last couple of years, tax revenues have soared, which have kept the deficit a little bit weaker. But the bottom line is that the deficit, to me, represents spending on fighting terrorism. And we have to do that to keep this country safe over time. We also have to keep tax rates low, in order to keep the economy growing, so that we can afford to fight the war on terror.

GIGOT: Can we afford a tax increase now, in the name of cutting the deficit? Is the economy strong enough now to be able to absorb something like that?

WESBURY: Yes, I don't think so. In fact, it never is. We always ought to work to keep tax rates low. In the end, taxes are there to fund the government. And what we should do is make sure that the tax code is the least burdensome possible on entrepreneurs especially. And what I have seen in recent years is that when we cut taxes, business investment, entrepreneurial activity surge. And we need to keep that going, because that revenue increase is the only thing that's keeping the deficit from exploding today.

GIGOT: All right. So the economy is quite healthy today. But what are the biggest threats you see right now to this expansion continuing?

WESBURY: Well, there's a couple of them. I mean, obviously government spending outside of the war on terror is increasing rapidly. That's a bother to me. Trade protectionist fears are a little bit of a bother to me. But there's two other things that I think are most important. And that is, number one, inflationary pressures are beginning to increase. That's because the fed was way too easy for too long.

And number two, the Congress seems to be having a difficult time extending these tax cuts. Right now the capital gains and qualified dividends tax cuts are scheduled to end in 2008. They need to extend them at least to 2010. Without that certainty, we could see the stock market suffer. We could see investments suffer.

GIGOT: Okay Brian, it sounds like we've got to pay attention to what's going on Washington. That's the biggest threat to the expansion now. Thanks for coming in.

WESBURY: Thank you, Paul.

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