Question

1. In looking at Real World Fiscal Policy, one might want to consider the timing, or lag, or speed at which a policy can go into effect. How do the Tax cuts of 2001,2003, and the 2020 policies stack up when looking at timing issues?

Answer 1

The biggest tax policy changes enacted under President George W. Bush were the 2001 and 2003 tax cuts, often referred to as the “Bush tax cuts” but formally named the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). High-income taxpayers benefitted most from these tax cuts, with the top 1 percent of households receiving an average tax cut of over $570,000 between 2004-2012. Despite promises from proponents of the tax cuts, evidence suggests that they did not improve economic growth or pay for themselves, but instead ballooned deficits and debt and contributed to a rise in income inequality.

The 2001,2003 and 2020 tax cuts reduced the top four marginal income tax rates (see Table 1), as well as the tax rate on capital gains and dividends. Reducing the top marginal tax rates (the tax on each additional dollar of income above a threshold) reduced the average tax rate (total tax liability as a share of total income) for all taxpayers with incomes above those thresholds.

Income Tax Rate Reductions Under the 2001 and 2003 Tax Cuts
Taxable Incomea	Previous Rate	New Rate
Below $17,000	15%	10%
$17,000 — $68,000	15%	15%
$68,000 — $137,000	28%	25%
$137,000 — $209,000	31%	28%
$209,000 — $374,000	36%	33%
Above $374,000	39.6%	35%

The cost of the tax laws enacted during George W. Bush’s administration is equal to roughly 2 percent of gross domestic product (GDP) in 2010, the year the provisions were fully phased in.This figure includes the amount the tax cuts increased the cost of “patching” the Alternative Minimum Tax (AMT) to keep the tax from affecting millions of upper-middle-class households, a problem the tax cuts helped to cause.

At the time, many policymakers — including President Bush and Federal Reserve Chair Alan Greenspan — cited projected surpluses and falling debt as a reason to cut taxes. But as the nation’s fiscal outlook changed, because the tax cuts were financed by borrowing, they added to a growing national debt.

The 2 percent of GDP cost figure does not include the extra interest costs resulting from the required borrowing. In 2013 CBPP estimated that, when the associated interest costs are taken into account, the Bush tax cuts (including those that policymakers made permanent) would add $5.6 trillion to deficits from 2001 to 2018. This means that the Bush tax cuts will be responsible for roughly one-third of the federal debt owed by 2018.

The largest benefits from the Bush tax cuts flowed to high-income taxpayers.

From 2004-2012 (the years for which comparable estimates are available), the top 1 percent of households received average tax cuts of more than $50,000 each year. On average, these households received a total tax cut of over $570,000 over this period.

High-income taxpayers also received the largest tax cuts as a share of their after-tax incomes. The Tax Policy Center estimated that in 2010, the year the tax cuts were fully phased in, they raised the after-tax incomes of the top 1 percent of households by 6.7 percent, while only raising the after-tax incomes of the middle 20 percent of households by 2.8 percent. The bottom 20 percent of households received the smallest tax cuts, with their after-tax incomes increasing by just 1.0 percent due to the tax cuts.

Policymakers enacted the 2001 and 2003 tax cuts with the promise that they would “pay for themselves” by delivering increased economic growth, which would generate higher tax revenues. But even President Bush’s Treasury Department estimated that under the most optimistic scenario, the tax cuts would at best pay for less than 10 percent of their long-term cost with increased growth.

Evidence suggests that the tax cuts — particularly those for high-income households — did not improve economic growth or pay for themselves, but instead ballooned deficits and debt and contributed to a rise in income inequality.

In fact, the economic expansion that lasted from 2001 to 2007 was weaker than average. A review of economic evidence on the tax cuts by Brookings Institution economist William Gale and Dartmouth professor Andrew Samwick, former chief economist on George W. Bush’s Council of Economic Advisers, found that “a cursory look at growth between 2001 and 2007 (before the onset of the Great Recession) suggests that overall growth rate was … mediocre” and that “there is, in short, no first-order evidence in the aggregate data that these tax cuts generated growth.”

In comparison, the economic expansion of the early 1990s — which followed considerable tax increases — produced a much faster rate of job growth and somewhat faster GDP growth than the expansion of the early 2000s. An analysis of business activity between 1996 and 2008 found that even the sharp cut in dividend tax rates in 2003, which proponents claimed would spur immediate business growth, had no significant impact on business investment or employee compensation after 2003.

And, when the tax cuts were scheduled to expire at the end of 2012, extending the high-income tax cuts in particular was projected to have almost no effect on economic growth. The Congressional Budget Office (CBO) estimated in 2012 that extending the high-income tax cuts would have boosted GDP by just 0.1 percent in 2013. Indeed, allowing the high-income tax cuts to expire after 2012 does not appear to have had any substantial negative impacts on economic growth, as proponents of the tax cuts had claimed, and the economy has continued to grow steadily since then. This is consistent with the broader empirical literature about taxes on high-income people and economic growth. As one comprehensive review of the empirical literature by three leading tax economists found, “there is no compelling evidence to date of real responses of upper income taxpayers to changes in tax rates.”