Jobs and Growth Tax Relief Reconciliation Act (2003)

Why JGTRRA Should Have Ended in 2004

JGTRRA gave a tax break to Wall Street after the 9/11 attack destroyed the World Trade Towers, pictured here. Photo: Silvestre Machado/Getty Images


The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) is an investment tax cut that was enacted by the Bush Administration on May 28, 2003, to finally end the 2001 Recession.

Specifically, JGTRRA:

  • Reduced the long-term capital gains tax rate from 20% to 15%. For taxpayers who are already in the 10%-15% income tax bracket, it reduced the rate to 5%, and then to zero in 2008. 
  • Changed the dividend tax rate to the same as the long-term capital tax rate. Prior to that, dividends were taxed as regular income.
  • Increased tax deductions for small businesses.
  • Accelerated many of the provisions in EGTRRA, which were supposed to be phased in more gradually.
  • Raised the exemption for the Alternative Minimum Tax.

All JGTRRA tax changes were for the entire 2003 tax year. In other words, it made the changes retroactive to January 1.

Why Was JGTRRA Needed?

The 9/11 attacks created massive economic uncertainty just as the United States was recovering from the 2001 recession. The resultant War on Terror, as war always does, introduced additional uncertainty. The economy grew just 1.0% in 2001, improving mildly to 1.8% in 2002. For more, see GDP by Year.

EGTRRA was the first Bush tax cut to attack the recession. It had effectively cut personal income taxes, but hadn't helped businesses. Bush was a follower of supply-side economics, which says that cutting business costs will allow them to hire more workers, boosting income even more powerfully than income tax cuts.


How Did JGTRRA Affect the Economy?

Initially, JGTRRA helped the economy out of recession by putting more dollars into the pockets of businesses and investors, and ultimately consumers. It encouraged investment in the stock market by decreasing capital gains and dividend taxes. That's because it reduced the tax cost of buying stocks, which made them more attractive when compared to bonds.

That put $9.2 billion more into the pockets of stockholders in just the first year.

As dividend-paying stocks become more popular, companies issue more of them instead of bonds. That means more of their financing comes from stocks. That helps them in a downturn because they are less likely to default on bond payments, which are fixed. This reduces the risk of corporate bankruptcies. 

It encouraged companies to increase dividend payments. More than 200 companies, most notably Target, Citigroup, and Walgreen, announced dividend increases by July 2003. (Source: "The Jobs and Growth Tax Relief Reconciliation Act and Its Effect on Dividends," U.S. Treasury, July 30, 2003)

Many companies, most notably Microsoft, started issuing dividends for the first time. Much of executive compensation is paid in stocks and stock options. This became even more popular when the tax burden on dividends was lessened for high-income earners. 

As a result of JGTRRA, total dividend payments increased 20% from 2003 - 2012, after declining for the previous 20 years. (Source: Laura Kawano, "Tax Policy and the Dividend Clientele Effect," Penn Wharton Public Policy Initiative, Volume 1, Number 10)

Investors also bought more dividend-paying stocks, boosting profitability of companies that paid dividends.

These included foreign companies that were in countries that had signed tax treaties with te United States. (Source: Mihir Desai and Dhammika Dharmapala, Taxes and Portfolio Choice, NBER)

The economy grew a robust 3.8% in 2004, and the Federal Reserve started raising interest rates again to slow the economy down. That's because the ideal economic growth rate should remain within the 2-3% range. Faster than that, and it runs the chance of overheating. For more, see What Is the Business Cycle?

For that reason, President Bush's tax cuts should have expired in 2004 or 2005, when the economy was booming again. Higher taxes would have slowed spending, helping to prevent the housing boom that led to the 2008 financial crisis.

Unfortunately, JGTRRA was designed to expire in 2008. The newly-elected Obama Administration and Congress, faced with the Great Recession, had to extend it until 2010.

The tax cuts were extended again until 2012 as part of the deal to avoid the Fiscal Cliff. They now have no expiration date.  

Like any other tax cut, JGTRRA hurts the economy by decreasing tax revenues. This increases each year’s annual deficit, and therefore the U.S. debt.  In fact, the debt doubled during the Bush Administration, to $11.6 trillion, both from lower tax revenues and higher defense spending. For more, see U.S. Debt by President.

In the long run, high debt puts downward pressure on the value of the dollar, which raises the cost of imports and can trigger inflation.