Bush tax cuts


The Bush tax cuts were the changes to the United States tax code passed originally during the presidency of George W. Bush and extended during the presidency of Barack Obama, through:
While each act has its own legislative history and effect on the tax code, the JGTRRA amplified and accelerated aspects of the EGTRRA. 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. Both laws were passed using controversial congressional reconciliation procedures.
The Bush tax cuts had sunset provisions that made them expire at the end of 2010, since otherwise they would fall under the Byrd Rule. Whether to thwart the sunset provisions, and how, became the subject of extended political debate, which was resolved during the presidency of Barack Obama by a two-year extension that was part of a larger tax and economic package, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. In 2012, during the fiscal cliff, Obama overcame the sunset provisions and made the tax cuts permanent for single people earning less than $400,000 per year and couples making less than $450,000 per year, but did not stop the sunset provisions from applying to higher incomes, under the American Taxpayer Relief Act of 2012.
Before the tax cuts, the highest marginal income tax rate was 39.6 percent. After the cuts, the highest rate was 35 percent. Once the cuts sunset for high income levels, the top income tax rate returned to 39.6 percent.

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. 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 a parallel system of calculating a taxpayer's tax liability that eliminates many deductions. However the applicable AMT rates were not adjusted to match the lowered rates of the 2001 and 2003 acts, causing many more people to face higher taxes. This reduced the benefit of the two acts for many upper-middle income earners, particularly those with deductions for state and local income taxes, dependents, and property taxes.
The AMT exemption level aspects of the 2001 and 2003 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.

CBO scoring

The non-partisan Congressional Budget Office has consistently reported that the Bush tax cuts did not pay for themselves and represented a sizable decline in revenue for the Treasury:
  • The CBO estimated in June 2012 that the Bush tax cuts of 2001 and 2003 added approximately $1.5 trillion total to the debt over the 2002–2011 decade, excluding interest.
  • The CBO estimated in January 2009 that the Bush tax cuts would add approximately $3.0 trillion to the debt over the 2010–2019 decade if fully extended at all income levels, including interest.
  • The CBO estimated in January 2009 that extending the Bush tax cuts at all income levels over the 2011–2019 period would increase the annual deficit by an average of 1.7% GDP, reaching 2.0% GDP in 2018 and 2019.

    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 say 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 increase receipts from the wealthiest Americans as their tax rates would decline without resort to tax shelters. Opponents argued the tax cuts on the wealthy were simply of the trickle down variety. 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.
A report published by staff at conservative public policy think tank The Heritage Foundation claimed that the 2001 cuts alone would result in the complete elimination of the U.S. national debt by fiscal year 2010.
The Heritage Foundation concluded in 2007 that the Bush tax cuts led to the rich shouldering more of the income tax burden and the poor shouldering less; while the Center on Budget and Policy Priorities has concluded that the tax cuts have conferred the "largest benefits, by far on the highest income households." CBPP cites data from the Tax Policy Center, stating that 24.2% of tax savings went to households in the top one percent of income compared to the share of 8.9% that went to the middle 20 percent. The underlying policy has been criticized by Democratic Party congressional opponents for giving tax cuts to the rich with capital gains tax breaks.
Statements by President Bush, Vice President Dick Cheney, and Senate Majority Leader Bill Frist that these tax cuts effectively "paid for themselves" have been disputed by the CBPP, the U.S. Treasury Department and the CBO. Economist Paul Krugman wrote in 2007: "Supply side doctrine, which claimed without evidence that tax cuts would pay for themselves, never got any traction in the world of professional economic research, even among conservatives." Since 2001, federal income tax revenues have remained below the 30-year average of 8.4% of GDP with the exception of 2007, and did not regain their year 2000 dollar peak until 2006, though reasons for regaining previous levels are not given.
Some policy analysts and non-profit groups such as OMBWatch, Center on Budget and Policy Priorities, and the Tax Policy Center have attributed much 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, including those given to middle and lower income households, failed to spur growth. Critics have further stated that the cuts also increased the budget deficit, shifted the tax burden from the rich to the middle and working classes, and further increased already high levels of income 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 argued 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.
Economist Simon Johnson wrote in 2010: "The U.S. government doesn’t take in much tax revenue—at least 10 percentage points of GDP less than comparable developed economies—and it also doesn’t spend much except on the military, Social Security and Medicare. Other parts of government spending can be frozen or even slashed, but it just won’t make that much difference. That means older Americans are going to get squeezed, while our ability to defend ourselves goes into decline. Just because there’s a bipartisan consensus on an idea, such as tax cuts, doesn’t mean it makes sense. Today’s tax cutters have set us up for tomorrow’s fiscal crisis and real damage to U.S. national security."
A The Washington Post article takes a different view, saying that data showed the biggest contributor to the disappearance of projected surpluses was increased spending, which accounted for 36.5 percent of the decline in the nation's fiscal position, followed by incorrect CBO estimates, which accounted for 28 percent. The Bush tax cuts were responsible for just 24 percent.
The New York Times stated in an editorial that the full Bush-era tax cuts were the single biggest contributor to the deficit over the past decade, reducing revenues by about $1.8 trillion between 2002 and 2009. However, a 2006 article asserted that there was a "surprising jump" in tax revenue that was "curbing" the deficit.
CBO estimated in June 2012 that the Bush tax cuts added about $1.6 trillion to the debt between 2001 and 2011, excluding interest. A 2006 Treasury Department study estimated that the Bush tax cuts reduced revenue by approximately 1.5% GDP on average for each of the first four years of their implementation, an approximately 6% annual reduction in revenue relative to a baseline without those tax cuts. The study did not extend the analysis beyond the first four years of implementation.

Debate over continuation of cuts

Most of the 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. During his presidential election campaign, then candidate Obama stated that couples with incomes less than $250,000 would not be subjected to tax increases. This income level later became a focal point for debate over what defined the middle class.
In August 2010, the Congressional Budget Office estimated that extending the tax cuts for the 2011–2020 time period would add $3.3 trillion to the national debt, comprising $2.65 trillion in foregone tax revenue plus another $0.66 trillion for interest and debt service costs.
The non-partisan Pew Charitable Trusts estimated in May 2010 that extending some or all of the 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 $3.3 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 $2.2 trillion in the next decade.
  • Extending the tax cuts for all taxpayers for only two years would cost $561 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, for a combined total of $3.5 trillion.
In late July 2010, analysts at Deutsche Bank said letting the Bush tax cuts expire for those earning more than $250,000 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 couples making less than $250,000 per year. Economist Mark Zandi predicted that making the Bush tax cuts permanent would be the second least stimulative of several policies considered. Making the tax cuts permanent would have a multiplier effect of 0.29.