tax cuts and global prosperity

I've written often enough about the risks associated with the growing deficit in the U.S., enough I'm sure to have become tedious on the subject. And so I take no delight in the announcement of extended tax cuts. The Washington Post article on the subject points out that -- once again -- lots of money will go to the wealthy and regressively little to people in the middle and lower brackets. It also deals with a question that is for me very important: What effect, if any, does this outrageous give-away have on the economy? It's an important question because the U.S. economy is the strongest in the world. It's because of this strength that foreigners are willing to purchase our debt, finance our deficit, and invest in our securities markets. We know this relative strength is partly based on the weakness of other industrial economies (Europe and Japan) and on the high levels of productivity achieved by U.S. businesses.

Is any of this strength dependent on the radically imbalanced U.S. tax policy?

The article says Republicans claim this is so. Others, and not just their opponents, say otherwise. Here are extracts on this topic:

Republicans say .. tax cuts were crucial to spurring economic growth over the past three years, by persuading more corporations to offer larger dividends and by sparking new business investment. ... Some economists say the timing of those gains was coincidental. "You might credit the cuts with providing a little bit of a jump-start. But I think the main reason the economy has done so well the last couple of years has nothing to do with tax policy, and more to do with the corporate sector starting to spend some of their record profits," said Ethan Harris, chief U.S. economist of the Lehman Brothers investment bank. "We had very good markets in the '90s, before all these tax cuts went into effect," said former Treasury secretary Robert E. Rubin.

Here's a citation for the article and two useful tables.

GOP Reaches Deal on Tax Cuts
$70 Billion Measure Would Extend Breaks

By Jonathan Weisman and Paul Blustein
Washington Post Staff Writers
Wednesday, May 10, 2006; Page A01

How Much Would You Save Under the Plan? - Average tax saving

Income, in 2005 dollars	Average tax saving
$10,000-20,000	$2
$20,000-30,000	9
$30,000-40,000	16
$40,000-50,000	46
$50,000-75,000	110
$75,000-100,000	403
$100,000-200,000	1,388
$200,000-500,000	4,499
$500,000-1 million	5,562
More than $1 million	41,977

Highlights of the Tax Package - House and Senate Republicans finalized a five-year, nearly $70 billion tax package. Some key points:

	COST	BENEFIT
Reduced rates on capital gains and dividends (House bill provision)	$20.6 billion over 5 years, $50.8 billion over 10 years.	Reduces 15 percent tax rate under current law to zero in 2008 for taxpayers in the 10 and 15 percent tax brackets. The provision extends these reduced rates through 2010.
Individual alternative minimum tax (AMT) exemption amount (Senate provision)	$31.0 billion over 5 years and 10 years.	Extends exemption levels through the end of 2006 at a higher level - $62,550 (married) and $42,500 (other).
AMT relief for personal tax credits (Senate provision with modifications)	$2.8 billion over 5 years and 10 years.	Allows the nonrefundable personal tax credits to the full extent of the individual's regular tax and alternative minimum tax for taxable years beginning in 2006.