Bush Tax Cuts: When They Expired, and Their Impact on the Economy

How 2 Tax Cuts for the Very Rich Affect You Today

Definition: The Bush tax cuts were two tax code changes that President Bush authorized during his 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. As a result, they were a major issue in the 2012 Presidential campaign. Candidates debated over whether Congress should continue them for those making $250,000 or more. They were extended permanently as part of the deal to avoid the fiscal cliff. President Bush also authorized the U.S. Treasury to mail out a one-time tax rebate in 2008. It was unsuccessful in preventing the financial crisis.

EGTRRA Income Tax Cut - 2001

George W. Bush

In 2001, President George Bush authorized a tax cut called the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). It stimulated the economy during the 2001 recession. It saved taxpayers, but increased the debt, by $1.35 trillion over a 10-year period. The Urban Institute said the tax cuts benefited families with children the most. It also helped those with incomes over $200,000. 

It was designed to expire in 2011. Little did the originators know that that's when the economy was still struggling to recover from the worst recession since the Great Depression. More

JGTRRA Business Investment Tax Cut - 2003

JGTRRA
JGTRRA helped Wall Street after losing the World Trade Towers in 9/11.. Photo: Silvestre Machado/Getty Images

In 2003, President Bush authorized the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). It reduced tax rates on long-term capital gains and dividends to 15%. It also accelerated the provisions in EGTRRA that were supposed to be phased in gradually. It increased tax deductions for small businesses. It was supposed to expire in 2012. More

Income Tax Rebate - 2008

Bush
President George W. Bush talking about North Korea.. Photo: Alex Wong/Getty Images

Congress approved the $168 billion Bush tax rebate in early 2008. Everyone got tax relief on the first $6,000 of taxable income for individuals and the first $12,000 of income for couples. People received a check in the mail, which felt like free money. Instead, they were getting their tax withholding back. Each rebate dollar spent generated $1.19 in additional economic growth. The one-time rebate was a little more than 1% of GDP. That should have been enough to boost economic growth. Unfortunately, the collapse of Lehman Brothers, Fannie Mae, Freddie Mac, and AIG later that summer 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. More

Mid-Term Elections - 2010

Bush Tax Cuts Popular
Voters said "No new taxes." (Photo: Getty Images).

Frustration over President Obama's economic stimulus package led to the Republican Tea Party movement. It opposed any tax increases. Obama had pledged to allow the Bush tax cuts to expire for those making more than $200,000 a year. The Tea Party said this would hurt job creation by hurting the small business owners who create 60% of all new jobs. The 2010 mid-term elections resulted in a Republican majority in the House. This upset in power meant the Bus tax cuts would be approved by the lame-duck Congress before the year was out.

Did the Bush Tax Cuts Expire?

Bush Tax Cut Extended
President George Bush and President Barack Obama both approved tax cuts. (Photo: Brendan Smialowski / Getty Images).

The Bush tax cuts weren't due to expire until the end of 2010. But Congress was faced with an earlier deadline. The IRS had to issue its 2011 tax withholding table by mid-December 2010. That was a mid-term election year. No Congressman wanted to jeopardize re-election by voting against the extension. Congress and President Obama approved a two-year extension, even though the President fought against the extension for wealthier taxpayers. The $858 billion tax cut deal cut payroll taxes by 2%. It also extended a college tuition tax credit and revived a 35% inheritance tax on the wealthy. More

The Theory Behind Tax Cuts

Bush Tax Cuts followed supply-side economic theory
President Ronald Reagan was a proponent of supply-side economics. (Photo: The White House).

Tax cuts are an easy and quick way to stimulate the economy by putting more money directly into taxpayers' hands. According to supply-side economics, tax cuts increase consumer spending enough to make up for the revenue loss. That's because consumers and businesses spend enough of the tax cuts to increase demand and create jobs. It creates so much economic growth that tax revenues ultimately rise. The same effect doesn't occur with increased government spending, according to the theory. More

Laffer Curve

The Laffer Curve (Photo: Arthur Laffer).

Supply-side economics was based on the Laffer Curve, developed in 1979 by economist Arthur Laffer. The curve describes how tax cuts affect government revenues. The first is "arithmetic," which creates an immediate loss of tax revenue. The second is "economic," which is longer-term. Over time, consumers will spend their tax savings, creating more demand and more business growth. Eventually, this will replace the lost revenue. However, for the tax cuts to have this impact, taxes before the cuts must be in the "Prohibitive Range" on the curve. If taxes are already lower than that range, then they will only have the "arithmetic" effect. More

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