It’s easy to like a tax cut when Alan Greenspan says it’s OK.
On Thursday the chairman of the Federal Reserve reversed himself, at least a little, by telling the Senate Budget Committee that some of the billions in the government’s surplus could be devoted to lowering taxes. In the past Greenspan wanted the surplus earmarked to pay off the national debt.
“And so have my views changed? Yes, they’ve changed,” Greenspan told the senators.
The central banker also sounded more ominous than he has before about the economy, saying growth is “probably very close to zero.” That comment led analysts to conclude the Fed will cut interest rates by a half-point when its policymaking arm next meets Tuesday and Wednesday.
Around Chicago, everyone from CEOs to truckdrivers was saying they liked the sound of a tax cut. After Greenspan spoke, it was hard to find anyone much opposed to lower taxes.
Still, some question whether lawmakers will be committed to debt reduction without the resolute prodding of the powerful Greenspan. And some say the potential for additional rate reduction could be coming too late to head off a painful slump.
While Greenspan worries the nation’s economic growth is slowing, the trucking industry is deep in recession already.
“Any type of tax cut would help our business,” said Fred Serpe, executive director of the Illinois Transportation Association, which speaks on behalf of 14,000 trucking firms around the state. “It might keep some businesses open.”
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Trucking is a leading indicator of recession, and the 2,600 trucking companies that went bankrupt nationally last year may be a sign the economy will soon grow weaker.
Like trucking, manufacturing is in a deep slump and could use some help from Congress.
Jerry Jasinowski, president of the National Association of Manufacturers, thinks interest rates and tax bills both need to go down if the economy is to prosper.
“The most powerful thing about the chairman’s comments,” Jasinowski said, “is his acknowledgement that we are near zero economic growth, which justifies both an additional interest rate reduction and a tax cut.”
Big labor is joining big business in calling for a tax cut–although unions would like to see the benefit go to people passed over by the nation’s decadelong boom.
“Clearly we would want to see the benefits of those tax cuts go to the people at the bottom of the tax scale,” said Don Turner, president of the Chicago Federation of Labor. The federation represents 500,000 unionized workers in Cook County.
“These are the people who need it most,” Turner said.
An added benefit: Low-income people tend to spend money on essentials as quickly as they get it, making for an immediate boost to the economy.
One prominent consultant said the technology industry, still staggering from last year’s beating, needs tax cuts and lower interest rates if it is to heal.
“To the extent that rates are reduced and confidence in the capital markets is restored, that will [promote] capital expenditures in large companies,” said Brian Johnson, a managing partner at global consulting firm Accenture, formerly known as Anderson Consulting, and an adviser to new technology ventures. “That will be good for the technology sector.”
Johnson noted that tax policy won’t help companies with unrealistic business plans. “Nothing in this is going to solve the problem of a company that hasn’t figured out how to get customers that will pay for services,” Johnson said.
Tax cuts are nice, another business executive said, but a debt-free America has merit too.
Harry Kraemer, chief executive of medical products giant Baxter International Inc., said he trusts Greenspan will do the right thing.
Kraemer said he believes a tax cut should be just one portion of a monetary policy that includes paying down the debt.
“I don’t think cutting taxes is the panacea, but … a component of a well thought-out policy,” Kraemer said. “It’s got to have a balance.”
Of course, not everyone was cheering.
Craig Sieben, president of the energy management consulting firm Sieben Energy Associates, has an emphatic answer to the question of tax cuts and the budget surplus: “Pay the debt off faster.”
Sieben said the annual budget surpluses are such a recent phenomenon, no one can say for certain they will continue.
“We have had a great run over the last decade,” he said. “Let’s get this country into shipshape.”
Some people would like a tax cut so they will have more money to spend.
“I think we do need a cut,” said Mark Rund, a Chicago social worker. “My paycheck is 33 percent less because of taxes, which is a pretty big chunk. We need some relief.”
“We would love a tax break,” added K.K. Cleland, a former Chicago advertising executive now rearing two sons with her husband, a stockbroker. “You work really hard at your career, and by the time you add up all the taxes it’s 40 percent.”
Others say layoff announcements, poor corporate earnings and a much more cautious stock market are reason enough for a tax cut.
Ottawa software engineer Andy Brodie, in town from Canada this week to visit a client, said he has noticed a downturn in attitudes since his last business trip to the United States.
“A cut would be a good thing for business,” he said.
Investment advisers who held clients’ hands through last year’s turbulent stock market–and grim financial statements this month–also welcomed the idea of lower taxes.
“The Fed may be too late to avoid the inevitable [economic slump], but a tax cut would allow us to have a softer landing,” said William Gela, an Evanston consultant. “My clients are well diversified, but for a lot of people who just checked the most aggressive plan in the 401(k), it was a nasty year.”
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Greenspan’s support for a tax cut and implied support for lower interest rates alarms some people, who figure the economy must be in worse shape than widely believed.
“Greenspan’s comments are bittersweet,” said Quintin E. Primo III, co-chairman of Chicago-based real estate investment firm Capri Capital.
“A tax cut and a further drop in interest rates would be very, very good, but they are being done because there is such weakness in the economy,” said Primo, whose firm has a $3.7 billion commercial mortgage portfolio.
And although well-established developers and real estate owners are likely to benefit from lowered interest rates, other firms won’t be so lucky.
As uncertainty about the future grows, Primo said, borrowers will have a tougher time getting credit. The upshot, he warned: “A potential credit crunch.”