The Bush tax cuts were two tax code changes that President George W. Bush authorized during his first term. Congress enacted tax cuts to families in 2001 and investors in 2003. They were supposed to expire at the end of 2010. Instead, Congress extended them for two more years, and many of the tax provisions remain in effect—and continue to affect the economy—to this day.
Bush Tax Cuts Timeline
President Bush oversaw three major tax cuts.
EGTRRA Income Tax Cut of 2001
In 2001, President George Bush authorized a tax cut called the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) to stimulate the economy during the recession that year. The major provisions were to reduce marginal income tax rates and reduce and eventually repeal estate tax. As a result, it saved taxpayers, but not equally. The tax cuts benefited high-income individuals the most; those in the top 1% of households saw their average tax rates fall by 4.1% compared with only 2% or less for other households. In addition, it increased the U.S. debt by $1.35 trillion over a 10-year period.
JGTRRA Tax Cut of 2003
In 2003, President Bush authorized the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). It reduced tax rates on long-term capital gains and dividends to 15%. It also increased tax deductions for small businesses. JGTRRA also accelerated several provisions in EGTRRA that were taking too long, such as an increase in the standard deduction for married couples. An increase in the child care credit benefited middle-income households, but as with EGTRRA, high-income earners benefited the most.
Income Tax Rebate of 2008
Congress approved the $168 billion Bush tax rebate in early 2008. The rebate amounted to an average of $1,000 per taxpayer and was sent through a stimulus check, in the mail or electronically, to 130 million households.
That amount should have been enough to boost economic growth. Unfortunately, by the time the checks went out, Lehman Brothers had collapsed. The bailout of Fannie Mae, Freddie Mac, and the American Investment Group destroyed confidence in the global banking system. It negated any positive effect of the tax rebates by plunging the U.S. economy into five quarters of recession.
Bush Tax Cut Expiration
The phase-out of the tax reductions did not pan out as expected.
Impact of Expiration on 2010 Mid-Terms
In 2009, President Obama signed into the law the American Recovery and Reinvestment Act, which had the aim of providing tax relief and promoting economic recovery. However, frustration over the costs of the economic stimulus package led to the Tea Party movement, which opposed increased spending and growth of the deficit.
During his 2008 presidential campaign. Obama had pledged to allow the Bush tax cuts to expire for those making more than $250,000 a year. The Tea Party said this would stifle job creation by hurting the small business owners who create 60% of all new jobs. This had an impact on the 2010 mid-term elections, which created a Republican majority in the House.
Why the Tax Cuts Never Truly Expired
Congress scheduled the Bush tax cuts to expire in 2010 to comply with the Byrd rule, which prohibits any tax law to increase the deficit beyond 10 years.
However, that was a mid-term election year. No Congressperson wanted to jeopardize re-election by voting against a proposed extension to the Bush tax cuts and thereby raising taxes on low- and middle-income Americans.
As a result, Congress and President Obama approved a two-year extension of the tax cuts until 2012 as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The $858 billion deal cut payroll taxes by 2%. It also extended a college tuition tax credit and revived the estate tax.
EGTTRA should have expired again in 2011. But the economy was struggling to recover from the worst recession since the Great Depression. In 2012, President Obama signed the American Taxpayer Relief Act of 2012, which made permanent 82% of the Bush tax cuts.
Bush tax cut provisions that expired included reduced income, capital gains, and dividend tax rates, limits on personal exemptions, and reduced estate tax rates.
Economic Impacts of the Bush Tax Cuts
The cuts had the cumulative effect of adding to the debt without significantly boosting growth. The top 1% of households gained an after-tax income increase of 6.7%, while those in the lowest fifth made gains of just 1%.
Research shows no evidence that tax cuts have any impact on the spending habits of upper-income taxpayers. The Bush tax cuts would only increase growth enough to make up 10% of their long-run cost. In addition, maintaining the cuts has been estimated to cost $4.6 trillion from 2012 to 2021.
Drivers of the Bush Tax Cuts
Both political and economic reasons motivated the Bush tax cuts.
Campaign Pledge to Cut Taxes
George W. Bush had vowed to cut taxes during his presidential campaign in 2000. When he took office in 2001 amidst a recession, he argued that tax cuts would help stimulate the sluggish economy and that the surplus from the Clinton administration could help pay for them.
The notion that tax cuts promote economic growth is rooted in supply-side economics, which posits that lower tax rates boost productivity, employment, and output. Proponents argue that tax cuts are an easy and quick way to stimulate the economy by putting more money directly into taxpayers' hands. They operate under the belief that all tax cuts increase consumer spending enough to make up for the revenue loss. This assumes that consumers and businesses spend enough of the tax cuts to increase demand and create jobs, spurring so much economic growth that tax revenues ultimately rise.
The theory behind supply-side economics is the Laffer Curve. Developed in 1979 by economist Arthur Laffer, the curve depicts how tax cuts affect government revenues. It suggests that when the tax rate is zero or 100%, revenues are at zero. The government can increase rates until a certain point—represented by the peak of the curve—and still increase revenues. But when tax rates are in the so-called "prohibitive range," increasing tax rates can reduce revenues, and conversely, reducing tax rates can increase revenues.
But for the tax cuts to have this impact, taxes before the cuts must be in the "prohibitive range" on the curve. While proponents of the Bush tax cuts argued that the tax burden was onerous in the Clinton era, critics of the Bush tax cuts argue that the government was not in the prohibitive range of tax rates. Indeed, rather than increase revenue, revenue dropped from 2001 to 2003 as the Bush tax cuts were initially rolled out. They did not rise until the cuts were fully implemented.
Some economists theorize that the recession may have played a role in dampening the potential revenue increase of the tax cuts. But they note that it's difficult to estimate the extent to which the cuts would have increased revenue in the absence of a recession.
Bush Versus Trump Tax Cuts
Both the Bush- and Trump-era tax cuts increased the deficit and debt. However, President Bush's tax cuts occurred during the 2001 recession and the years immediately following. President Donald Trump's tax cut occurred while the economy was solidly in the expansion phase of the business cycle.
President Trump signed the Tax Cuts and Jobs Act on December 22, 2017. It cut individual income tax rates, doubled the standard deduction, and eliminated personal exemptions.
The plan lowered the top individual tax rate from 39.6% to 37% and cut the corporate tax rate from a maximum rate of 35% to a flat rate of 21%. The corporate cuts are permanent, while the individual changes expire at the end of 2025.
The Act is estimated to increase the deficit by $1 to $2 trillion from 2018 to 2025. It will only increase growth by 0.7% annually, thus reducing some of the revenue loss from the tax cuts.