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Non-Tech : The Critical Investing Workshop -- Ignore unavailable to you. Want to Upgrade?

To: Uncle Frank who wrote (31554)	9/1/2000 3:38:26 PM
From: Mannie	Read Replies (1) \| Respond to of 35685

Over Tax, Under Grow By Lawrence Kudlow The big economic event this summer has been the Fed’s decision to pull back from additional tightening moves. The dog has stopped barking. Hooray. After deflating the high-powered liquidity base and repeatedly raising the overnight fed funds rate -- a double-barreled tightening move that will restrain economic activity well into next year -- the Fed has cast aside its Phillips curve austerity jihad and relegated the Laurence Meyer Hezbollah faction to a position of diminished importance. Sir Alan lately has sided with the Jerry Jordan-Robert McTeer-William Poole sound money reform faction that favors market price indicators as policy guides, especially long-term corporate bond rates. In a world where technology-induced productivity gains have contained costs and improved the economy’s long-run capacity to grow, this is a very sensible approach. Soon after Jerry Jordan’s Cleveland Fed report thoroughly trashed the NAIRU-istas in Washington, Greenspan burned his productivity-is-bad speech and picked up his earlier message praising the growth-enhancing benefits of the new economy. Dallas Fed president McTeer continues to weigh in from the western frontier that Schumpeterian gales of creative destruction are counter-inflationary because the production of more goods absorbs the existing money supply. Following the shifting wind, other Fed presidents are now backing the Jordan-led reformers. Sensing that the Fed has stopped short of causing a recession, stock markets have cheered the tightening halt with a 15% summer rally. The dollar exchange rate index has surged while gold has weakened. The January market for fed funds futures now shows only a one-third probability of any new tightening at all, whereas last May that market signaled at least another 50 basis point hike. Euro dollar futures have similarly backed off. However, as Fed policy recedes as a growth-hindering problem, there’s new trouble over the horizon. Soaring individual tax payments are robbing the purchasing power that families need to save, invest and consume. This tax-drag effect has already slowed personal spending, retail sales and housing. Business inventory accumulation is beginning to look top-heavy. A classic precursor of cyclical slowdowns. Surely the Fed-induced hike in financing costs is a factor in the consumer slowdown. But rising tax burdens and slowing take-home pay -- points typically overlooked by mainstream economic analysis -- is also a growing burden. Take a look at the personal spending and disposable income data. In the past year personal tax payments have increased by 12%, double the rise in personal income. Twelve-percent tax payment increases are probably an interplanetary record. While income has jumped $504 billion, tax payments have risen $138 billion. So 27% of the income gain has been absorbed by taxes. That’s a 27% average economywide tax-rate. As a result, disposable income is slowing. Adjusting for inflation, which is also a tax, real disposable income growth has slowed to 2.8% recently from 4% earlier. It’s a drawdown in take-home pay. Meanwhile, five years ago, when the Internet boom started, tax payments claimed only 16% of personal income. So the average individual tax-rate has grown to 27% from 16%. A big jump. In effect, people are working harder but are earning proportionately less. In our excessively progressive tax code, successful wage earners are being pushed into higher tax brackets. This tax bracket creep work penalty is gradually eroding the momentum of economic growth. High tax payments are driving up federal surpluses, which could reach $260 billion for this fiscal year ending September 30. The on-budget operating surplus could reach $100 billion. Instead of transferring these taxpayer surpluses to wealthy bondholders and foreign governments through debt redemption and bond repurchases, the Administration would be better advised to return the tax over-payments to all working folks through across-the-board marginal tax-rate relief. This would replenish after-tax incentives and restore family purchasing power. The Fed’s next big surprise is likely to be a neutral policy directive at their meeting on October 3. This would lay the groundwork for a policy-easing move a few months later in 2001. But avoiding recession and returning to full 4% plus economic health will require lower personal tax-rates to replenish the massive overpayment of taxes that is draining the economy of its full power.