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Bush tax cuts

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The Bush tax cuts refers to two laws created and passed during the presidency of George W. Bush that generally lowered tax rates and revised the code specifying taxation in the United States. These were the:

While each act has its own legislative history and effect on the tax code, the JGTRRA amplified and accelerated aspects of the EGTRRA. Moreover, since 2003 the two acts have often been spoken of together, especially in terms of analyzing their effect on the U.S. economy and population and in discussing their political ramifications. This is especially true once discussion of the possible extension of the tax cuts, set to expire at the end of 2010, began taking place.

Implications for the Alternative Minimum Tax

The 2001 act and the 2003 act significantly lowered the marginal tax rates for nearly all U.S. taxpayers. One byproduct of this tax rate reduction was that it brought to prominence a previously lesser known provision of the U.S. Internal Revenue Code, the Alternative Minimum Tax (AMT). The AMT was originally designed as a way of making sure that wealthy taxpayers could not take advantage of "too many" tax incentives and reduce their tax obligation by too much. It is an alternate system of calculating a taxpayer's tax liability that removes many so called "tax preference items". However the applicable AMT rates were not adjusted in step with the lowered rates of the 2001 and 2003 acts, causing many more people to face higher taxes because of the AMT than had originally been planned. This reduced some of the benefit of the two acts for many upper-middle income earners, particularly those with large deductions for state and local income taxes, dependents, and property taxes.

The AMT exemption level aspects of the Bush tax cuts, as well as the sunsetting year of capital gains and dividends, were among the tweaks made to the tax code in the Tax Increase Prevention and Reconciliation Act of 2005.

Debate over effect of cuts

There was and is considerable controversy over who benefited from the tax cuts and whether or not they have been effective in spurring sufficient growth. Supporters of the proposal and proponents of lower taxes claimed that the tax cuts increased the pace of economic recovery and job creation. Further, proponents of the cuts asserted that lowering taxes on all citizens, including the rich, would benefit all and would actually pry more money from the wealthiest Americans as they would avoid tax shelters for their money. The Wall Street Journal editorial page states that taxes paid by millionaire households more than doubled from $136 billion in 2003 to $274 billion in 2006 because of the JGTRRA.

The Heritage Foundation has stated that the Bush tax cuts have led to the rich shouldering more of the income tax burden and the poor shouldering less; while the Center on Budget and Policy Priorities claims that the tax cuts have conferred the "largest benefits,by far on the highest income households." Bush was criticized for giving tax cuts to the rich with capital gains tax breaks, but some benefit extended to middle and lower income brackets as well. Bush has claimed that the tax cuts have paid for themselves but critics argue that this is false.

Some policy analysts and non-profit groups such as OMBWatch, Center on Budget and Policy Priorities, and the Tax Policy Center have attributed some of the rise in income inequality to the Bush administration's tax policy. In February 2007, President Bush addressed the rise of inequality for the first time, saying "The reason is clear: We have an economy that increasingly rewards education and skills because of that education."

Critics state that the tax cuts have failed to spur growth, while increasing the budget deficit, shifting the tax burden from the rich to the middle and working classes and further increasing already high levels of inequality. Economists Peter Orszag and William Gale described the Bush tax cuts as reverse government redistribution of wealth, " the burden of taxation away from upper-income, capital-owning households and toward the wage-earning households of the lower and middle classes." Supporters countered that the tax brackets were still more progressive than the brackets from 1986 until 1992, with higher marginal rates on the upper class, and lower marginal rates on the middle class than established by either the Tax Reform Act of 1986 or the Omnibus Budget Reconciliation Act of 1990, so any apocalyptic rhetoric was exaggerated.

The Congressional Budget Office estimated that the tax cuts would increase budget deficits by $60 billion in 2003 and by $340 billion by 2008. Supporters of President Bush argue that this analysis ignores the potential growth that the act could encourage. Supporters also argue that this would be further supported by analyzing the effect of the economic shock of the terrorist events of September 11, 2001. The terrorist fears, resulting reduction in travel and consumer expenditure, and increased security expenditures, they say, are a prime example of an economic cost shock, and they suggest that the recession of 2001 and 2002 would have been drastically worse had no attempts at promoting economic growth by reducing taxes been made, though there is no empirical evidence to support or disprove this claim (nor could there be). The lag between policy making and economic impact suggests the possibility to be remote, like any fiscal stimulus plan, most of which are fully enacted only when the recession is over.

Debate over possible extension of cuts

Most of the Bush tax cuts were scheduled to expire December 31, 2010. Debate over what to do regarding the expiration became a regular issue in the 2004 and 2008 U.S. presidential elections, with Republican candidates generally wanting the cut rates made permanent and Democratic candidates generally advocating for a retention of the lower rates for middle-class incomes but a return to Clinton-era rates for high incomes.

The Congressional Budget Office has estimated that extending the cuts at their rate levels would cost the U.S. Treasury nearly $1.8 trillion in the following decade, dramatically increasing federal deficits and exacerbating entitlement-related risks.

The non-partisan Pew Charitable Trusts estimated in May 2010 that extending some or all of the Bush tax cuts would have the following impact under these scenarios:

  • Making the tax cuts permanent for all taxpayers, regardless of income, would increase the national debt $3.1 trillion over the next 10 years.
  • Limiting the extension to individuals making less than $200,000 and married couples earning less than $250,000 would increase the debt about $2.3 trillion in the next decade.
  • Extending the tax cuts for all taxpayers for only two years would cost $558 billion over the next 10 years.

The non-partisan Congressional Research Service has estimated the 10-year revenue loss from extending the 2001 and 2003 tax cuts beyond 2010 at $2.9 trillion, with an additional $606 billion in debt service costs (interest), for a combined total of $3.5 trillion.

In late July 2010, analysts at Deutsche Bank said letting the Bush tax cuts for those earning more than $250,000 expire would greatly slow economic recovery. However, Treasury Secretary Timothy Geithner said allowing the expiration would not cause such a slowing. The Obama administration proposed keeping tax cuts for people making less than $250,000 per year. Economist Mark Zandi found that making the Bush tax cuts permanent would be the second least stimulative of several policies considered. Making the Bush tax cuts permanent would have a multiplier effect of 0.29 (compared to the highest multiplier of 1.73 for food stamps).

The issue came to a head in late 2010, during a lame-duck session of the 111th Congress.

At the "Slurpee Summit" of November 30, President Barack Obama appointed Treasury Secretary Tim Geithner and Office of Management and Budget chief Jack Lew to help Republicans and Democrats hammer out an agreement on extending the Bush tax cuts. All 42 Republican Senators pledged to block all legislation in the lame-duck session until the tax matter was settled.

In early December 2010, President Barack Obama announced that a compromise tax package proposal had been reached, centered around a temporary, two-year extension of the Bush tax cuts. In particular, it was billed as a framework including these key points:

  • Extending the 2001/2003 Income-Tax Rates for Two Years. Aslo, reforming the AMT to ensure that an additional 21 million households will not be hit with a tax increase. These measures are intended to provide relief to more than 100 million middle-class families and prevent an annual tax increase of over $2,000 for the typical family.
  • Additional Provisions Designed to Promote Vigorous Economic Growth. $56 billion in unemployment insurance, an about $120 billion payroll tax cut for working families, about $40 billion in tax cuts for the hardest hit families and students; and 100 percent expensing for businesses during 2011.
  • Adjustment to the Estate Tax. Rates go to 35 percent with a $5 million exemption.

Administration officials such as Vice President Joe Biden then had to try to convince wary Democratic members of Congress to accept it, despite the continuation of lower rates for the highest-income segments being an anathema to progressives.

See also

References

  1. "Their Fair Share". Wall Street Journal. July 21, 2008. http://online.wsj.com/article/SB121659695380368965.html
  2. Riedl, Brian M. (2007-01-29). "Ten Myths About the Bush Tax Cuts". The Heritage Foundation. Retrieved 2007-02-12.
  3. Friedman, Joel (2004-04-23). "Tax Returns: A Comprehensive Assessment of the Bush Administration's Record on Cutting Taxes". Center on Budget and Policy Priorities. Retrieved 2010-07-01. {{cite web}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  4. Welch, William (2007-07-01). "Dems call for ending tax cuts for rich". USA Today. Retrieved 2007-07-19. {{cite web}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  5. Kogan, Richard (2006-07-27). "Claim that Tax Cuts "Pay for Themselves" is Too Good to Be True". Center on Budget and Policy Priorities. Retrieved 2007-07-19. {{cite web}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  6. Income Inequality Has Intensified Under Bush
  7. Aron, Aviva (2007-01-23). "New CBO Data Show Income Inequality Continues to Widen — Center on Budget and Policy Priorities". Cbpp.org. Retrieved 2010-12-10.
  8. Rising Economic Inequality and Tax Policy
  9. Bush Addresses Income Inequality
  10. "Price, L. (October 25, 2005). The Boom That Wasn't: The economy has little to show for $860 billion in tax cuts" (PDF). Retrieved 2007-10-13.
  11. Andrews, Edmund L. (2007-01-08). "Tax Cuts Offer Most for Very Rich, Study Says". The New York Times. Retrieved 2007-01-14.
  12. Justin Fox (2007-12-06). "Tax Cuts Don't Boost Revenues". Time. Retrieved 2007-12-07.
  13. "Economists on Net Revenue Impact of Bush Tax Cuts. ". Retrieved 2007-11-10.
  14. "Price, L. & Ratner, D. (October 26, 2005). Economy pays price for Bush's tax cuts" (PDF). Retrieved 2007-11-10.
  15. "Gale, G. W. & Orzsag, P. R. (May 4, 2005). The Great Tax Shift". Retrieved 2007-11-11.
  16. CBO Analysis Page 6
  17. Pew Charitable Trusts-Decision Time: The Fiscal Effects of Extending the 2001 and 2003 Tax Cuts-May 2010
  18. Congressional Research Service-Thomas Hungerford-October 27, 2010
  19. "News Headlines". Cnbc.com. 2010-07-29. Retrieved 2010-12-10.
  20. Zandi, Mark. "A Second Quick Boost From Government Could Spark Recovery." Edited excerpts from congressional testimony July 24, 2008.
  21. THRUSH, GLENN (2010-11-30). "Barack Obama fields tax-talk team". The Politico. {{cite news}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  22. Espo, David (2010-12-01). "Senate GOP letter calls for blocking most bills". Associated Press.
  23. Simons, Meredith (2010-12-01). "GOP Senators Pledge to Block All Democratic Legislation". Slate magazine.
  24. Herszenhorn, David M.; Stolberg, Sheryl Gay (December 7, 2010). "Democrats Skeptical of Obama on New Tax Plan". The New York Times. Retrieved December 8, 2010.
  25. ^ "Fact Sheet on the Framework Agreement on Middle Class Tax Cuts and Unemployment Insurance | The White House". Whitehouse.gov. Retrieved 2010-12-10.
  26. Scherer, Michael (2010-01-14). "Playing The Tax Compromise Number Game - Swampland - TIME.com". Swampland.blogs.time.com. Retrieved 2010-12-10.
  27. Hulse, Carl; Calmes, Jackie (December 7, 2010). "Biden and G.O.P. Leader Helped Hammer Out Bipartisan Tax Accord". The New York Times. Retrieved December 8, 2010.

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