Obama Tax Cuts Facts and Consequences

Why Did Obama Extend the Bush Tax Cuts in 2010?

When people refer to President Obama's tax cuts, they generally refer to the $858 billion tax cut deal signed in 2010. It extended the Bush tax cuts through 2012 and unemployment benefits through 2011. It cut payroll taxes by 2 percentage points, adding $112 billion to workers' spendable income. It extended a college tuition tax credit. It also included $58 billion in industry-specific tax cuts.

Obama’s deal revived the inheritance tax that had been eliminated in 2010, but had been set to return to higher level. It applied a 35% tax rate to estates worth over $5 million for individuals.

But Obama also cut taxes in 2009 and 2013. In 2009, $288 billion were cut as part of the American Recovery and Reinvestment Act. In 2013, Obama approved the permanent extension of the Bush tax cuts for those below a certain income level. This was part of the fiscal cliff package.

2009 Economic Stimulus Package

man spending ARRA tax cuts on yellow peppers
ARRA tax cuts gave everyone more money to spend on the everyday items that revitalized the economy. Photo: Steve Debenport/Getty Images

In February 2009, Congress approved Obama’s economic stimulus package. It restored confidence and ended the Great Recession in July 2009. It cut $288 billion in taxes. It reduced that year's income taxes for individuals by $400 each and $800 for families. Instead of stimulus checks, workers received a lower withholding in their paychecks. It wasn't publicized very well, so many people didn't even notice the increase.

ARRA also reduced income taxes by the amount equal to the sales tax on a new car purchase. It provided tax cuts for investments in renewable energy and other small business tax cuts.

The Congressional Budget Office estimated ARRA would save between 900,000 and 2.3 million jobs. In addition to tax cuts, it spent $224 billion on entitlement programs, education and health care. It also spent $271 billion for job creation using federal contracts, grants, and loans.

2010: Extension of Bush Tax Cuts

Boehner and Obama agree on TPA
Speaker of the House John Boehner, U.S. President Barack Obama and Irish Prime Minister, or Taoiseach, Enda Kenny walk down the steps of the House of Representatives after they attended the St. Patrick's Day lunch at the U.S. Capitol March 17, 2015 on Capitol Hill in Washington, DC. Speaker Boehner hosted the lunch to celebrate St. Patrick's Day. Photo by Alex Wong/Getty Images

The Bush administration cut taxes in 2001 and 2003. The Economic Growth and Tax Relief Reconciliation Act cut income taxes. But most of those benefits accrued either to families with children or high-income earners. The Jobs and Growth Tax Relief Reconciliation Act cut corporate taxes and accelerated the income tax phase-in. Congress passed the Bush tax cuts to fight the 2001 recession. 

In 2010, the House gained more than 60 Republicans. That created a majority who elected a new House Majority Leader, John Boehner. Republicans won additional seats in the Senate, but not the majority. The Republicans wanted to reduce the deficit, keep the Bush tax cuts for everyone and eliminate Obamacare. The change meant Obama had to negotiate with the lame duck Congress. That enabled the Obama tax cuts to pass before the end of 2010.

2013: Fiscal Cliff Tax Cut

House Speaker John Boehner (R-OH) and President Obama
U.S. President Barack Obama (R) speaks as Speaker of the House Rep. John Boehner (R-OH) (L) looks on as the President meets with congressional leaders in the Cabinet Room of the White House July 11, 2011 in Washington, DC. Credit: Alex Wong/Getty Images

The fiscal cliff refers to the disaster that would have occurred if Obama and Congress hadn't agreed on a plan to prevent it. Without the deal, a combination of five tax increases and two spending cuts would have occurred on January 1, 2013. The CBO estimated it would have removed $607 billion from the economy in the first nine months of 2013. The economy would have contracted 1.3%, throwing the country back into recession.

Instead, the American Taxpayer Relief Act extended the Bush tax cuts for those with incomes below a threshold. This threshold was $400,000 for individuals and $450,000 for married couples. Incomes at and above the threshold were taxed at the Clinton-era 39.6% tax rate.

Do Tax Cuts Create Jobs?

All tax cuts are not equal in creating new jobs. (Photo: Tim Boyle/Getty Images)

Dollar for dollar, tax cuts are not the best way to create jobs

If Congress insists on tax cuts, then the best kind are payroll tax cuts. They create 13 new jobs for every $1 million. If these employers only get the cuts when they create new jobs, it boosts job creation to 18 jobs per $1 million.

Extended Unemployment Benefits Are Best Way to Boost Economy

groceries-light.jpg
Each dollar of unemployment benefits generates $1.64 in economic growth. Photo: Tetra Images/Getty Images

If Congress wants to get the best bang for the buck, it should extend unemployment benefits instead of cutting taxes. The CBO study found that unemployment benefits created 19 jobs for every $1 million spent.

In addition to creating jobs, every dollar spent on unemployment benefits stimulates $1.73 in economic demand. This is according to an Economy.com study. The unemployed spend every dollar they receive on essentials, such as food, clothing, and housing. 

How Tax Cuts Add to the Debt

U.S. debt
RNC Chairman Reince Priebus points to a display showing the national debt at the start of the Republican National Convention at the Tampa Bay Times Forum on August 27, 2012. Photo by Chip Somodevilla/Getty Images

At $26.6 trillion, the U.S. debt is the largest in the world. How did it get so large? Even before the economic crisis, the debt grew 50% between 2000 and 2007, ballooning from $6 trillion to $9 trillion. The $700 billion bailout helped the debt grow to $10.5 trillion by December 2008.

Why Do We Pay Taxes?

why do we have to pay taxes
Why do we have to pay taxes? Ask Congress. Photo: Pamela Moore/Getty Images

Why do we pay taxes? Blame Congress. It's the only federal branch that Constitution granted "the power to lay and collect taxes."  Of course, it does so to pay for government services. The largest of these are Social Security, Medicare, and our nation's defense. 

Obama Tax Cuts Compared to Trump Tax Cuts

Trump and Obama
U.S. President Barack Obama speaks while meeting with President-elect Donald Trump (L) following a meeting in the Oval Office November 10, 2016 in Washington, DC. Trump is scheduled to meet with members of the Republican leadership in Congress later today on Capitol Hill. Photo by Win McNamee/Getty Images

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act. It cut individual income tax rates, doubled the standard deduction, and eliminated personal exemptions.

Trump's tax plan lowered the top individual tax rate to 37%. It cut the corporate tax rate to 21%. 

The Act increases the deficit by $1 to $2 trillion over the next 10 years according to the Joint Committee on Taxation. It will increase growth by 0.7% annually, thus reducing some of the revenue loss from the $1.5 trillion in tax cuts. 

The Trump tax cut occurred while the economy was solidly in the expansion phase of the business cycle. The 2010 Obama cuts occurred only two years after the financial crisis. Congress was concerned that ending the cuts would throw the economy back into recession. Both cuts increased the deficit and debt.

Article Sources

  1. Congressional Budget Office. "The Budget and Economic Outlook: Fiscal Years 2011 to 2021," Page 8-9. Accessed Aug. 25, 2020.

  2. National Archives. "2010 Fiscal Year End Report to the President on Progress Implementing the American Recovery and Reinvestment Act of 2009," Page 4-8. Accessed Aug. 25, 2020.

  3. U.S. Congress. "H.R.8 - American Taxpayer Relief Act of 2012." Accessed Aug. 25, 2020.

  4. Congressional Budget Office. "The Budget and Economic Outlook: Fiscal Years 2011 to 2021," Page 66. Accessed Aug. 25, 2020.

  5. Tax Foundation. "Update: The Tax Savings From Final Fiscal Stimulus." Accessed Aug. 25, 2020.

  6. IRS. "Business Provisions of the American Recovery and Reinvestment Act of 2009 (ARRA)." Accessed Aug. 25, 2020.

  7. Congressional Budget Office. "Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output From October 2009 Through December 2009," Page 2. Accessed Aug. 25, 2020.

  8. The State of Texas State Auditor. "An Audit Report on American Recovery and Reinvestment Act Funds for Selected Programs at the Texas Education Agency." Accessed Aug. 25, 2020.

  9. National Archives. "Estimates of Job Creation From the American Recovery and Reinvestment Act of 2009." Accessed Aug. 25, 2020.

  10. Congressional Research Service. "An Overview of the Tax Provisions in the American Taxpayer Relief Act of 2012." Page 2-3. Accessed Aug. 25, 2020.

  11. Congressional Budget Office. "Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013," Page 1-2. Accessed Aug. 25, 2020.

  12. Congressional Budget Office. "Policies for Increasing Economic Growth and Employment in 2010 and 2011," Page 18. Accessed Aug. 25, 2020.

  13. Economy.com. "Washington Throws the Economy a Rope." Accessed Aug. 25, 2020.

  14. TreasuryDirect. "The Debt to the Penny and Who Holds It." Accessed Aug. 25, 2020.

  15. U.S. Congress. "H.R.1 - An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018." Accessed Aug. 25, 2020.

  16. Tax Policy Center. "How Did the TCJA Affect the Federal Budget Outlook?" Accessed Aug. 25, 2020.

  17. Urban Institute. "Macroeconomic Analysis of the Tax Cuts and Jobs Act." Accessed Aug. 25, 2020.