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The Tax Hikes Shouldn't Derail The Expansion


Economic Trends

THE TAX HIKES SHOULDN'T DERAIL THE EXPANSION

If history is any guide, tax hikes can be lethal to expansions. The last time both corporate and personal tax rates were raised, for example, was in 1968, and a recession followed. And the more recent tax increases of 1990 torpedoed an already foundering economy.

Economist Edward S. Hyman of investment consultants International Strategy & Investment Group Inc., argues that history won't repeat itself this time around, however. In the 1968-69 episode, he notes, the inflation rate was 5% and rising, bond yields were moving higher, and the federal funds rate hit 9%. And in late 1990, the economy was already weakening, fed funds and bond yields were both over 8%, the banking system was in trouble, and consumer prices were rising at a 6% clip.

By contrast, notes Hyman, business today is expanding, fed funds are at 3%, bond yields are at 25-year lows, banks are healthier, and inflation is around 3%. In sum, he says, "today's tax increases are occurring in a far more benign environment, and that means that they are much more likely to slow the economy than to push it into recession."GENE KORETZ


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