Tax Cuts Boosting Economy? Not Everyone Thinks So
Though many in Washington and Wall Street have applauded the bipartisan tax-cut package as a key economic stimulant, there are more than a few skeptics about its potential impact.
The eleventh-hour package—which extends the Bush tax cuts into 2011 and 2012, trims two percentage points off the payroll tax and adds another round of jobless benefits for the long-term unemployed—has even prompted some prominent financial firms to increase their forecasts for economic growth in 2011. (Click here to see details of tax package.)
Not Chris Rupkey of Bank of Tokyo-Mitsubishi.
"It's amazing to me the world is accepting this as stimulus," says Rupkey.
David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, is another firm skeptic.
"I'm not convinced all the so-called stimulus is going to show in GDP," he told CNBC recently.
Their argument in a nutshell: temporary changes in tax policy generally have little influence over consumer behavior.
"It [the stimulus money] could easily show up in a higher savings rate as it did in 2008," says Rothenberg, who expects 2011 GDP growth of 2.3 percent.
"With all the other [tax cuts] the government gave out, the consumer saved it," adds Rupkey. "If you look at the consumption data, you can't really see it."
A similarly-designed stimulus pacakge in 2008 did not make any significant different in consumer spending, even though the measure—which included a tax rebate and tax credit—was expected to put $120 billion into the hands of consumers.
Back then, as now, the consumer balance sheet is still suffering from a two-decade long, credit-fueled buying binge.
"Consumer budgets are relatively stretched," says Zach Pandl, an economist at Nomura Securities International.
"Deleveraging is still the them of the day," says Ram Bhagavatula, managing director at Combinatorics Capiital. "People use the bulk of it for that. It will take another year or so when the deleveraging is complete."
Bhagavatula, like Rupkey, did not raise his 2011 GDP forecast because of the stimulus package.
Like other economists, they expected the tax cuts to be extended in some form.
"I think most people thought they would be extended," adds Robert Brusca, chief economist at FAO Economics. "If the question is how much things change because of this legislation, the answer is not much."
If anticipation is a key consideration to the psychological equation, so may be perception. The legislative package doesn't actually cut income taxes. It does not raise them, so in that way it does not put more money in people's pocket.
"The way it is being talked about is kind of peculiar," say Brusca. "If anything has an impact, it is will most likely be the cut in payroll taxes, which was not expected. It will immediately increase take-home pay for 155 million workers. For an annual income of $50,000, for instance, it means $1,000 less in taxes."
On a broader basis, that represents about $120 billion, less than 1 percent of the nation's GDP, which was $14.75 trillion in the third quarter, based on the final report issued Wednesday.
Economists say that could mean anywhere between $20 billion and $70 billion in spending. The Joint Economic Committee on Taxation puts the impact at $60 billion.
At the same time, GDP estimates for 2011 vary widely, ranging from the around 2.5 percent to 4.5 percent, with the consensus in the 3.5 percent range. Oddly, some see growth at its strongest in the fourth quarter, while others see it slumping.
Consumers and taxpayers, however, may have more than the usual factors driving behavior.
The tax package came amid growing concerns about the ballooning budget deficit and a tsunami of budget cut and tax-hike proposlas from the president's deficit reduction commission.
"What's more debatable is how the average consumer is thinking about tax rates in the long run," says Pandl. "There's a pretty broad recognition that the state of govenment finances is poor. Real spending cuts and tax increases are inevitable."
Nomura is among those that see GDP growth slowing dramaqtically during the the year, from 3.8 percent in the first quarter to 2.5 percent in the fourth. Brusca is also forecasting a late slowdown, but not as severe.
Any consumer boom then may be a short-lived event in the beginning of the year; some even suggest it has already started, making a small contribution to the better-than-expected holiday spending.
Maybe, says Brusca. "You recognize you're going to have higher disposabler income, so it has a temporary kick."
"You create s a feel good effect for the economy," adds Rupkey.
Another wild card is gasoline prices, which have been creeping up during the second half of the year and are now above $3 dollars a gallon. Along with stock prices and the jobless rate, they are one of the keys to consumer sentiment.
Rising gasoline prices in 2008 put a damper on consumer spending, with some saying they absorbed a good part of the tax renate money.
"If they move up dramatically it will have an impact on spending," says Pandl.