July 07, 2003

The repercussions and reaction to the Bush tax rate cuts are being felt all over the world. The times are now reminiscent of those of the early 1980's when the U.S. reforms forced Europe to react and to try to catch up. The Iron Lady was swept into power and at the time she argued that it was embarrassing to see that the highest marginal tax rate in the U.S. was lower than the lowest rate in the UK. Europe reacted and began a broad scale reduction in personal income tax rates. The reforms weakened the Eurosclerosis and gave rise to a resurgent European economy. Since then the Europeans have adopted a common currency with the single objective to keep the EMU inflation rate below 2%. In fact, one can argue that the EMU has a monetary policy that is superior to that of the U.S.. The EMU mandate is to keep the EMU inflation rate at less than 2%, something that they could easily do. In contrast, although we believe that Greenspan is loosely following the price rule, the U.S. has no such explicit and clearly achievable inflation target. The reaction to the U.S. changes continues to this day.

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