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Will Tax Cuts Boost The Economy?

Will Tax Cuts Boost The Economy?The tax relief in President Bush’s economic stimulus plan – says a Tufts graduate and renowned economic advisor – may not solve the country’s economic woes. Washington.

Medford/Somerville, Mass. [01.10.03] On Wednesday, President George Bush announced more than $70 billion in tax cuts designed to boost the country's slowing economy. While a common approach to stimulating economic growth, tax cuts don't always result in the boost they were designed for, says a Tufts graduate and renowned economic advisor.

"I think that tax cuts, by and large, can be beneficial, but they may not give you the kind of bang for buck in terms of consumption or in terms of capital investment that you want," Robert Hormats - vice chairman of Goldman Sachs International - told NBC News. "A lot of them could go into improving household balance sheets."

The President, however, is banking on a variety of tax cuts to boost spending and growth.

"These tax reductions will bring real and immediate benefits to middle-income Americans," Bush said in a speech unveiling his stimulus plan at the Economic Club of Chicago on Wednesday. "Ninety-two million Americans will keep an average of $1,083 more of their own money ... Real money to help pay the bills and push the economy forward."

Reduced taxes may put more money in the hands of Americans, Hormats told NBC, but it's not always certain that they'll put the money back into the economy.

"If you give certain tax cuts to certain individuals, in many cases they don't spend them, or they don't invest them," Hormats - who received four degrees from Tufts - told NBC News. "It's awfully hard in some cases to ensure that the kind of incentives you want to work, work in the way you want them to."

Hormats cited recent history as an example.

"The rebates that we had a little over a year ago, only 17 to 18 percent of those rebates were actually spent," said the Tufts graduate, who has worked with Presidents Nixon, Ford, Carter, Reagan and Clinton. "People put a lot of that money into their savings account because they'd borrowed a lot in the past."

The same could happen again, as many investors considering saving their money until the economic picture looks brighter.

"There are things hovering over this economy, weak growth outlook for the economy itself, concerns about when corporate investment is going to come back in, concerns about additional acts of terrorism and of course, a war," Hormats told CNNfn in a December interview. "So, when you combine the economics with the geopolitics, it raises a lot of uncertainties in the minds of investors here and abroad."

While the Bush administration would like Americans to use the tax rebates to boost the economy, the decision to save money during uncertain times is hard to oppose.

"It's a rational thing for people who have borrowed a lot and have seen their stocks go down to try to replenish their savings for the future," Hormats - who earned a bachelors degree in political science and a masters degree, masters of law and diplomacy and a doctorate from Tufts' Fletcher School - told NBC. "And in an environment where people are very cautious - they're concerned about the war, they're concerned about terrorism, they're concerned about their jobs - it's not irrational to take a certain amount of the money they get from a tax cut and save it rather than spend it."

In his speech in Chicago, the president made it clear that he's well aware of the challenges facing the country and the economy.

"We're meeting the challenges to America," he said. "We're strengthening our economy, and we're taking a battle to our enemies. And we're not going to leave our work half-finished. In the months ahead, we will confront every threat to the safety and security of the American people. We'll press on. We'll turn our recovery into lasting growth and opportunity that reaches every corner of America."

The solution may lie in making tough choices about the nation's priorities - at home and abroad.

"There has to be some give, some sense of prioritization in the Congress and by the executive branch," Hormats - who serves on the Board of Overseers for Tufts' Fletcher School of Law and Diplomacy - told NBC News. "I'm all for a stimulus now, there are differences as to what kind of stimulus will be appropriate. And obviously we need to spend as much as possible, as much as is needed, to protect the security of the United States from terrorists at home and from threats abroad. But when we do that we have to set priorities, and we have not really done that in the same way that other presidents and other Congresses have in the past."

 

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