Presidents and the Economy: The Bush Tax Cuts
President George W. Bush became President in January of 2001, following a controversial decision of the United States Supreme Court in Bush v. Gore that caused many to question the legitimacy of his election. He had inherited an economy that had produced budget surpluses for the previous four fiscal years, but the nation was also in the midst of a period of economic recession due to what was known as the "Dot-com bubble" in which a number of internet-centered companies saw their fortunes rise and fall.
When terrorists attacked the World Trade Center and other targets on September 11, 2001, the economy suffered further adverse impacts. The Bush administration increased federal government spending to address the threat of terrorist attacks. The increase in spending was greater than under any previous President since Lyndon Johnson. The surplus in fiscal year 2000 was $237 billion—the third consecutive surplus and the largest surplus ever. In 2001, Bush's budget estimated that there would be a $5.6 trillion surplus over the next ten years, but those predictions did not factor in a war on terror.
Following a strategy used by previous Republican Presidents Calvin Coolidge and Ronald Reagan, Bush believed that tax cuts would stimulate the economy and cause government revenue to increase through the greater economic activity that would result from them. He faced congressional opposition, and decided to hold a series of townhall style meetings across the U.S. in order to increase public support for his plan for a $1.35 trillion tax cut, one of the largest tax cuts in U.S. history. Bush told his audience that unspent government funds should be returned to taxpayers. He said "the surplus is not the government’s money. The surplus is the people’s money."
Federal Reserve Chairman Alan Greenspan warned that a tax cut of such magnitude might result in a recession, but Bush believed that a tax cut would stimulate the economy and create jobs. Bush's planned tax cuts were also opposed by his Treasury Secretary, Paul O'Neill, who took the position that some of the tax cuts would contribute to budget deficits and undermine Social Security. In Bush's book Decision Points, he claims that O'Neill never openly disagreed with him on planned tax cuts, but O'Neill claims otherwise.
The Economic Growth and Tax Relief Reconciliation Act of 2001 and subsequent legislation in 2003 significantly lowered the marginal tax rates for nearly all U.S. taxpayers. The legislation failed to address a provision of the U.S. Internal Revenue Code known as the Alternative Minimum Tax (AMT). The AMT was originally intended as a way of making sure that wealthy taxpayers could not take advantage of too many tax incentives and reduce their tax obligation by too much. But the AMT rates were not adjusted to match the lowered rates of the 2001 and 2003 acts, causing many people to face higher taxes. This oversight was addressed in the Tax Increase Prevention and Reconciliation Act of 2005.
By 2003, the economy showed signs of improvement, although job growth remained stagnant. This was the justification for the second tax cut program that year. Unemployment originally rose from 4.2% in January 2001 to 6.3% in June 2003, but subsequently dropped to 4.5% by July 2007. Adjusted for inflation, median household income dropped by $1,175 between 2000 and 2007, but after-tax median household income increased by 2%. The poverty rate increased from 11.3% in 2000 to 12.3% in 2006.
But most problematic was that the national debt which had risen to $11.3 trillion by October of 2008, an increase of over 100% from 2000 when the debt was only $5.6 trillion. Most of the debt was acquired due to a combination of the tax cuts and increased national security spending. Economists Richard Kogan and Matt Fiedler estimate the cost of the tax cuts over their first six years at $1.2 trillion.
Increased spending for defense and homeland security, mainly prosecuting the wars in Iraq and Afghanistan, amounted to almost $750 billion. According to economist Lawrence Kudlow, this is not as significant as it first appears. Kudlow said, "The U.S. has spent roughly $750 billion for the five-year war. Sure, that’s a lot of money. But the total cost works out to 1 percent of the $63 trillion GDP over that time period. It's minuscule." There is not universal agreement among economists about the cost of the wars. Nobel prize winner Joseph Stiglitz has estimated the total cost of the wars at almost $3 trillion.
In December 2007, the United States entered the longest post–World War II recession. It included a housing market correction, a subprime mortgage lending crisis, soaring oil prices, and a declining dollar value. In February of 2008, 63,000 jobs were lost, a five-year record. In 2008 President Bush signed a $170 billion economic stimulus package which was intended to improve the economic situation by sending tax rebate checks to many Americans and providing tax breaks for struggling businesses. In September 2008, the crisis became much more serious with the collapse of Lehman Brothers and a federal bailout of American International Group for $85 billion.
In November 2008, over 500,000 jobs were lost, which marked the largest loss of jobs in the United States in 34 years. The Bureau of Labor Statistics reported that in the last four months of 2008, 1.9 million jobs were lost. By the end of 2008, the U.S. had lost a total of 2.6 million jobs.
The Bush tax cuts had sunset provisions that made them expire at the end of 2010. Continuing the lowered rates became the subject of further debate, and an issue inherited by President Barack Obama. On December 6, 2010, agreement on a two-year extension of the Bush tax cuts was reached as part of a larger tax and economic package, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
In 2012, the tax cuts were made permanent for single people making less than $400,000 per year and couples making less than $450,000 per year, and eliminated for everyone else, under the American Taxpayer Relief Act of 2012.
Before the tax cuts, the highest marginal income tax rate was 39.6 percent. After the cuts, the highest rate was 35 percent. Once the cuts were eliminated for high income levels (single people making $400,000+ per year and couples making $450,000+ per year), the top income tax rate returned to 39.6 percent.
When terrorists attacked the World Trade Center and other targets on September 11, 2001, the economy suffered further adverse impacts. The Bush administration increased federal government spending to address the threat of terrorist attacks. The increase in spending was greater than under any previous President since Lyndon Johnson. The surplus in fiscal year 2000 was $237 billion—the third consecutive surplus and the largest surplus ever. In 2001, Bush's budget estimated that there would be a $5.6 trillion surplus over the next ten years, but those predictions did not factor in a war on terror.
Following a strategy used by previous Republican Presidents Calvin Coolidge and Ronald Reagan, Bush believed that tax cuts would stimulate the economy and cause government revenue to increase through the greater economic activity that would result from them. He faced congressional opposition, and decided to hold a series of townhall style meetings across the U.S. in order to increase public support for his plan for a $1.35 trillion tax cut, one of the largest tax cuts in U.S. history. Bush told his audience that unspent government funds should be returned to taxpayers. He said "the surplus is not the government’s money. The surplus is the people’s money."
Federal Reserve Chairman Alan Greenspan warned that a tax cut of such magnitude might result in a recession, but Bush believed that a tax cut would stimulate the economy and create jobs. Bush's planned tax cuts were also opposed by his Treasury Secretary, Paul O'Neill, who took the position that some of the tax cuts would contribute to budget deficits and undermine Social Security. In Bush's book Decision Points, he claims that O'Neill never openly disagreed with him on planned tax cuts, but O'Neill claims otherwise.
The Economic Growth and Tax Relief Reconciliation Act of 2001 and subsequent legislation in 2003 significantly lowered the marginal tax rates for nearly all U.S. taxpayers. The legislation failed to address a provision of the U.S. Internal Revenue Code known as the Alternative Minimum Tax (AMT). The AMT was originally intended as a way of making sure that wealthy taxpayers could not take advantage of too many tax incentives and reduce their tax obligation by too much. But the AMT rates were not adjusted to match the lowered rates of the 2001 and 2003 acts, causing many people to face higher taxes. This oversight was addressed in the Tax Increase Prevention and Reconciliation Act of 2005.
By 2003, the economy showed signs of improvement, although job growth remained stagnant. This was the justification for the second tax cut program that year. Unemployment originally rose from 4.2% in January 2001 to 6.3% in June 2003, but subsequently dropped to 4.5% by July 2007. Adjusted for inflation, median household income dropped by $1,175 between 2000 and 2007, but after-tax median household income increased by 2%. The poverty rate increased from 11.3% in 2000 to 12.3% in 2006.
But most problematic was that the national debt which had risen to $11.3 trillion by October of 2008, an increase of over 100% from 2000 when the debt was only $5.6 trillion. Most of the debt was acquired due to a combination of the tax cuts and increased national security spending. Economists Richard Kogan and Matt Fiedler estimate the cost of the tax cuts over their first six years at $1.2 trillion.
Increased spending for defense and homeland security, mainly prosecuting the wars in Iraq and Afghanistan, amounted to almost $750 billion. According to economist Lawrence Kudlow, this is not as significant as it first appears. Kudlow said, "The U.S. has spent roughly $750 billion for the five-year war. Sure, that’s a lot of money. But the total cost works out to 1 percent of the $63 trillion GDP over that time period. It's minuscule." There is not universal agreement among economists about the cost of the wars. Nobel prize winner Joseph Stiglitz has estimated the total cost of the wars at almost $3 trillion.
In December 2007, the United States entered the longest post–World War II recession. It included a housing market correction, a subprime mortgage lending crisis, soaring oil prices, and a declining dollar value. In February of 2008, 63,000 jobs were lost, a five-year record. In 2008 President Bush signed a $170 billion economic stimulus package which was intended to improve the economic situation by sending tax rebate checks to many Americans and providing tax breaks for struggling businesses. In September 2008, the crisis became much more serious with the collapse of Lehman Brothers and a federal bailout of American International Group for $85 billion.
In November 2008, over 500,000 jobs were lost, which marked the largest loss of jobs in the United States in 34 years. The Bureau of Labor Statistics reported that in the last four months of 2008, 1.9 million jobs were lost. By the end of 2008, the U.S. had lost a total of 2.6 million jobs.
The Bush tax cuts had sunset provisions that made them expire at the end of 2010. Continuing the lowered rates became the subject of further debate, and an issue inherited by President Barack Obama. On December 6, 2010, agreement on a two-year extension of the Bush tax cuts was reached as part of a larger tax and economic package, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
In 2012, the tax cuts were made permanent for single people making less than $400,000 per year and couples making less than $450,000 per year, and eliminated for everyone else, under the American Taxpayer Relief Act of 2012.
Before the tax cuts, the highest marginal income tax rate was 39.6 percent. After the cuts, the highest rate was 35 percent. Once the cuts were eliminated for high income levels (single people making $400,000+ per year and couples making $450,000+ per year), the top income tax rate returned to 39.6 percent.