The Dow and the Bush Tax Cuts


With the Dow industrials making new records every day of late–even cracking the 13,000 barrier to fascinate all the Wall Street numerologists out there–I thought it would be a real kick to see how the stock market has performed since Congress passed the 2003 Bush tax cuts on May 23, 2003. (The Jobs and Growth Tax Relief Reconciliation Act accelerated the 2001 tax cuts and cut taxes on capital gains and dividends.) Since then, the Dow is up 52 percent, the S&P 500 60 percent, and the Nasdaq 69 percent. (Overall, the stock market has created some $6.8 trillion in new wealth since then as the size of the economy has grown by some $2.8 trillion, not adjusted for inflation.)

Now the U.S. House passed the tax cuts in 2003 by 11 votes, 211 to 200. In the Senate, Vice President Cheney had to cast the tie-breaking vote for the bill to pass, 51 to 50. Yet I wonder if those narrow votes would have been so close had Congress somehow known that the housing market was topping out. The rising stock market, along with–finally–strong income growth, has helped cushion some of the blow from that nasty and ongoing decline. Also note that the federal budget deficit was $378 billion, or 3.5 percent of gross domestic product, in 2003. But by 2006, the deficit had shrunk to $248 billion, or 1.9 percent of GDP. And it sure looks as if those numbers are headed even lower as tax revenues continue to flood Uncle Sam's coffers at an amazing pace. In fact, the U.S. Treasury said that it took in $48.7 billion on Tuesday alone, a new record. As the econ team at JPMorgan Chase noted yesterday:

"Receipts for the April tax season, which had been running on the light side, are now up about 9 percent over last year. ... We continue to look for a budget deficit for FY07 of $150 billion."

If JPMorgan is right, the deficit would be a minuscule 1 percent of GDP at the end of this year. Now one could argue that the super stock market and declining deficit are somehow happening independently of the tax cuts. That is what the government's "static analysis" economic models do. They're the same ones, of course, that predict no negative economic effect from $2 trillion of tax hikes if the Bush tax cuts from 2001 and 2003 are left to expire at the end of 2010, as some in Congress and in the Democratic presidential race advocate. I wonder if investors will have the same benign analysis.