The phrase Bush tax cuts refers to changes to the United States tax code passed originally during the presidency of George W. Bush, he passed two controversial bills into law. While each act has its own legislative history and effect on the tax code, the 2003 act amplified and accelerated aspects of the original 2001 act. Since 2003, the two acts have often been spoken of together, especially in terms of analyzing their effect on the U. S. economy and population and in discussing their political ramifications.
Both laws were passed using controversial Congressional reconciliation procedures. In terms of, should the Bush era tax cuts be continued? There are positives and negatives associated with the two controversial bills, along with background information, but continuing the tax cuts will increase the deficit as well as provide majority of tax breaks to high income families and continue putting a burden on the lowest 20% of income families. II. Economic Growth and Tax Relief Reconciliation Act In 2001 President George W.
Bush signed a tax bill into law, The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) barely made it through Congress as a budget reconciliation measure, the only way it could be protected from a Democratic filibuster. The Economic Growth and Tax Relief Reconciliation Act of 2001 was a controversial piece of tax legislation in the United States by President George W. Bush. It is commonly known by its abbreviation “EGTRRA”, and sometimes also known simply as the 2001 act, but is more commonly referred to as one of the two “Bush tax cuts”.
When President Bush took office, “the highest earners in the country were taxed at 39. 6 percent of their normal earned income, 38. 6 percent on dividend income and 20 percent on long-term capital gains like investments” (Roos). Soon after that, “Congress responded with a bill that lowered tax rates in all income tax brackets by 3 to 5 percent, created a new 10 percent tax bracket for the lowest-earning households, doubled the child tax credit, erased the “marriage penalty” and blunted the impact of the estate tax.
Since the Senate didn’t have the votes to pass these cuts as a regular bill, the measure was crafted as a budget reconciliation, which can’t be filibustered. However, it did come with an expiration date. No budget reconciliation can add to the federal deficit for more than 10 years, so the tax cuts included a “sunset clause” that made these cuts revert to 2001 levels at the end of 2010” (Roos). “The Economic Growth and Tax Relief Reconciliation Act of 2001 generally reduced the rates of individual income taxes as well.
Areas effected included; “a new 10% bracket was created for single filers with taxable income up to $6,000, joint filers up to $12,000, and heads of households up to $10,000, the 15% bracket’s lower threshold was indexed to the new 10% bracket, the 28% bracket would be lowered to 25% by 2006, the 31% bracket would be lowered to 28% by 2006, the 36% bracket would be lowered to 33% by 2006, the 39. 6% bracket would be lowered to 35% by 2006” (Roos). III. Jobs and Growth Tax Relief Reconciliation Act
In 2003, President Bush signed The Jobs and Growth Tax Relief Reconciliation Act of 2003. This made a lot of changes to the first one, “Among other provisions, the act accelerated certain tax changes passed in the Economic Growth and Tax Relief Reconciliation Act of 2001, increased the exemption amount for the individual Alternative Minimum Tax, and lowered taxes of income from dividends and capital gains. The 2001 and 2003 acts are known together as the “Bush tax cuts”. JGTRRA accelerated the gradual rate reduction and increase in credits passed in EGTRRA.
The maximum tax rate decreases originally scheduled to be phased into effect in 2006 under EGTRRA were retroactively enacted to apply to the 2003 tax year. Also, the child tax credit was increased to what would have been the 2010 level, and “marriage penalty” relief was accelerated to 2009 levels. In addition, the threshold at which the alternative minimum tax applies was also increased. JGTRRA increased both the percentage rate at which items can be depreciated and the amount a taxpayer may choose to expense under Section 179, allowing them to deduct the full cost of the item from their income without having to depreciate the amount.
In addition, the capital gains tax decreased from rates of 8%, 10%, and 20% to 5% and 15%. Capital gains taxes for those currently paying 5% (in this instance, those in the 0% and 15% income tax brackets) are scheduled to be eliminated in 2008. However, capital gains taxes remain at the regular income tax rate for property held less than one year. Certain categories, such as collectibles, remained taxed at existing rates, with a 28% cap. In addition, taxes on “qualified dividends” were reduced to the capital gains levels. Qualified dividends” includes most income from foreign corporations, real estate investment trusts, and credit union and bank “dividends” that are nominally interest” (Bush). “One of the most heavily debated topics in Congress right now is whether or not to extend the Bush tax cuts. The Bush tax cuts were a lowering of income and capital gains taxes for all Americans. These tax cuts contained a sunset provision which would allow them to expire at the end of this year. Both parties agree that 98% of Americans should continue receiving tax cuts.
Tax cuts will be renewed for individuals making under $200,000 a year and couples making under $250,000. The debate is over extending tax cuts for the wealthiest 2% of Americans and large corporations. When you read the headlines, it makes sense to oppose tax cuts for the people who can afford taxes and will never notice it, but it’s a little more complicated than what the headlines depict. Let’s take a look at both sides of the argument for and against tax cuts” (Riddix). IV. Cons of The Tax Cuts
The Bush tax cuts never delivered what they had promised, ““Tax relief will create new jobs, tax relief will generate new wealth, and tax relief will open new opportunities. ” So said President George W. Bush on April 16, 2001 as he was pushing for the passage of the first of his many tax cuts. President Bush was pushing the same line on his second package two years later: “These tax reductions will bring real and immediate benefits to middle-income Americans…By speeding up the income tax cuts, we will speed up economic recovery and the pace of job creation. ” (Linden). They didn’t deliver. The economy boasted 132 million jobs in June of 2001, the month that the first of the Bush tax cuts was signed into law. Three years later, in June of 2004, there were just 131. 4 million jobs.
The economy did not add a single new job during three years under the Bush tax cuts. The next three years were better than the first three as the private sector struggled back to its feet following the first Bush recession. By June of 2007, before the start of the Great Recession, total jobs had grown to 137. 7 million. Overall, the six years following the Bush tax cuts saw a 4. percent increase in jobs” (Linden). Let’s not forget, “President Bush promised his tax cuts would deliver, “real and immediate benefits to middle-income Americans. ” They did not deliver at all, “The cuts were a spectacular failure on this score, too. Real income for the median American household went from $51,356 in 2001 to $52,163 six years later—an increase of just 1. 6 percent” (Linden). “President Bush—having inherited a record surplus from President Clinton—promised in 2001 that his tax cuts would not harm the overall federal budget picture.
Bush argued in selling his huge tax cuts that, “I know a lot of folks around America are worried about national debt, as am I. We [will] pay down $2 trillion of debt over the next 10 years. ” Not only that, said Bush, but, “We’ve got a trillion dollars of contingency set aside over the next 10 years. And there’s still money left over. There’s still money left over. ” Needless to say, that’s not how things turned out. Total publicly held debt stood at $3. 3 trillion at the beginning of fiscal year 2002, four months after President Bush signed the first package of tax cuts into law.
Six years later publicly held debt passed $5 trillion. Not only did the Bush tax cuts not produce a $2 trillion debt reduction; they had precisely the opposite effect. In fact, the Bush tax cuts have directly added $2. 5 trillion to the national debt in the full 10 years that they have been law” (Linden). The main argument against the extension of tax cuts are; “The case against tax cuts is that they are not stimulative to economic growth at all. Some people believe that high income earners will just save the money from the tax cuts and not invest it in our economy.
The argument goes on to state that companies have figured out how to maximize production from their current workforce so there is no incentive to hire any additional employees even with additional money from tax cuts. To push even more for the removal of tax cuts, people argue that high income earners are less affected by marginal tax changes since they spend less of their income (so therefore they can “deal” with higher taxes). Tax cuts would cause the government’s tax receipts to decline and the federal deficit to balloon even larger.
The government does not take in enough money now to fund its current level of spending. Entitlement spending on Social Security, Medicare, and Defense is projected to increase dramatically over the next decade. So, reducing the government’s tax revenue at the current time will only increase the national debt long term. The belief is that tax cuts will take money from the federal government and further enrich wealthy Americans” (Riddix). “When the issue moved toward the forefront in the late summer of 2010, Democrats expressed confidence that Republicans would not kill a bill that benefits most Americans.
But they worried that Republicans could delay action by pressing the argument that it would increase taxes for small businesses, discomfiting Democrats with re-election troubles and requiring some Republican votes for a supermajority. Democrats countered that most small businesses would not be affected; government data show that 97 percent of individual tax returns with business income would not be hit by the top rates. But, some Democrats acknowledge, the Republicans’ argument has proven politically potent in the past.
In August, Alan Greenspan, the former Federal Reserve chairman, whose support was crucial to the passage of the 2001 bill, called for allowing all the tax cuts to expire for the sake of the nation’s long-term fiscal health. But on Sept. 23, Democrats in the Senate decided to postpone a highly contentious floor fight over what to do about the expiring Bush-era tax cuts until after the November elections, a decision that spared some politically vulnerable incumbents from casting a potentially difficult vote to let some taxes rise.
After the Republican victories in the November election, the White House and Democratic leaders in Congress began exploring compromises in which a concession to Republicans on extensions for high-income earners would be traded for measures they hope will help the economy, like an extension of unemployment benefits, or a payroll tax holiday. Senate Democrats offered to extend the tax cuts for income up to $1 million, not Mr. Obama’s proposal of $250,000 per couple limit.
They planned to stage votes to force Republicans to go on record supporting the high-end tax cuts and to use the outcome to cast Republicans as putting the interests of millionaires ahead of other priorities, like reducing the deficit and providing additional benefits to the unemployed. The House passed Mr. Obama’s preferred tax plan. But after Republicans in the Senate used the filibuster to block it and the “millionaire’’ alternative, senior Democrats were resigned to defeat in the highly charged tax debate (Rosenthal). V. Pros of The Tax Cuts Tax cuts in the past have shown success, “The 1978 Steiger Capital Gains Tax Cut (named after Representative Bill Steiger of Wisconsin) measure which reduced the tax rate on the gains resulting from the sale of assets resulted in many people suddenly selling stocks and other assets whose price had increased noticeably since the purchase of the asset (with most of the increase being due to the government’s continued inflating of the money supply rather than any gain in the real value of the assets).
Much of this money, which had been invested in assets associated with the old industrial economy which was not growing, was reinvested in the new high tech economy and contributed greatly to the high tech boom of the 1980s and 1990s (this boom was further fueled by the Reagan cuts in income taxes during the 1980s)” (Chuck). The idea that the Bush era tax cuts will stir the economy has to do with trickle-down economics. “The argument for tax cuts is that they place more money in the pockets of consumers and companies. Individuals will then turn around and spend this money.
The additional tax savings would be used to purchase American goods and services, thus spurring economic growth. Corporations and businesses would then have more money to invest which would lead to greater employment and investments. The underlying belief is that every dollar saved via tax cuts results in one dollar (or more) of economic activity. One argument is that the government would actually take in more money from tax cuts to the “rich. ” Higher income earners save and invest more money than any other income class.
One study shows that individual’s that earn over $200,000 per year account for nearly 80% of all capital gains, meaning they are investing in the economy (and not just stashing away their money). The government would also increase their tax revenue since tax cuts incentivize business owners to reinvest in their businesses either through capital expenditures or adding new employees. Thus, the government will gain tax revenue due to new employee hiring’s (more people to pay income tax) and increased net income (for businesses). The belief is that an increase in long term-tax revenues will pay for the tax cuts” (Riddix). In 2001 and 2003, Congress passed tax cuts proposed by President George W. Bush. At the time, Mr. Bush and the Republican leaders of Congress certainly believed they were rewriting the tax code permanently, but the laws they passed actually gave the cuts an expiration date at the end of 2010. The question of what would happen then became more relevant after Republicans lost control of Congress in 2006, and the two parties have been fighting about them ever since, with Republicans pushing to make them permanent and Democrats seeking to end them for upper-income households.
Their fate now seems likely to play a significant role in the 2012 presidential campaign. In 2008, Barack Obama campaigned on a promise to roll back the high-end cuts, but a Democratic Senate balked at muscling through that change. After making huge gains in the November 2010 midterm elections, Republicans announced they would block all legislation in the lame-duck session that followed until all the cuts were extended. In December 2010, Mr. Obama reached a deal with Republicans that extended the tax cuts at all income levels through the end of 2012 (they expire Jan. , 2013) as part of a package that would also keep benefits flowing to the long-term unemployed, cut payroll taxes for all workers for a year and take other steps to bolster the economy.
It also continued tax breaks on dividends and capital gains, and lowered the estate tax. In September 2011, Mr. Obama again proposed ending the tax breaks for taxable income above $250,000 per household as part of a $3 trillion deficit reduction plan. In 2012, the issue took on new urgency as economists warned that inaction would put the nation over a “fiscal cliff,’’ if the tax cuts and other stimulative measures were allowed to expire on Jan. , 2013 just as tough spending cuts were set to kick in, a combination that could damage the fragile economic recovery. Mr. Obama called for a one-year extension of the cuts on household income below $250,000. Senate Democrats put together a bill to do that while raising income, capital gains and estate tax rates to rise on income above that level; in addition, the bill extended tax breaks for lower-income families that were passed as part of the 2009 stimulus bill.
In July, Senate Republicans unexpectedly dropped a planned filibuster and the Senate passed the Democratic plan. A Republican plan to extend all the Bush-era cuts while ending the 2009 tax breaks was defeated 54 to 45. The Republicans acted knowing that their colleagues in the House would block the Democratic plan. But the frantic give-and-take over tax cuts set to expire Jan. 1 illustrated how anxious both sides were to provide a way for senators to weigh in on the tax fight. In early August, the House easily approved a one-year extension of all the Bush-era tax cuts.
The House vote and the Senate passage of the Democratic plan gives the parties some political cover during the August recess, when each will blame the other for an economic crisis expected in January when more than $500 billion in tax cuts are set to lapse” (Rosenthal). “In June 2012, confusing economic comments, first by former President Bill Clinton, then by Lawrence Summers, President Obama’s first National Economic Council director. They emboldened Republicans to press for the immediate extension of all of the expiring Bush-era tax cuts, with a claim that they have bipartisan backing. Mr.
Clinton said Washington should do nothing that would slow economic growth. He appeared to be voicing a position that neither party has embraced: stop the short-term spending cuts and extend the tax cuts, but only temporarily” (Rosenthal). VI. Conclusion In my opinion, the Bush era tax cuts lowered the tax margin for all levels of income and everyone on the social continuum. None the less, the majority of tax relief came to those in the top 1% of income earned. This was the idea that if the rich have more money to spend, they will spend it on a lot of things, which in turn will trickle down to everyone else and improve our static economy.
This has proven to be ineffective, but shortly after the election of President Obama, he proposed a few plans of his own which I agree with. First, he wanted to keep the middle and lower classes tax margin static and give the higher classes a raise that was very similar to that of the Clinton era. Obviously these where shot down by Republicans in Congress. I would like to see marginal tax benefits for both of the working classes or wage earners, and also higher tax rates for the families earning more than $250,000 per year.
This seems unfair but at the same time these families have certain tax right offs that other simply cannot afford. For example, parents who send their children to private schools have a tax right off as well as providing a higher quality of education for their children. Another example would be, Maids, having individuals that clean your house is a luxury for the upper classes, and in turn they provide money to a hardworking individual but also receive tax right offs for doing so.
With this method of thinking it can be somewhat safe to assume that even thought my idea would be to raise taxes for highest income earners, they will still receive other benefits that will assist them with their tax burden as well. Of course this would only be possible with the approval from Congress. I although do believe Former President Bush had good intensions for the working classes, the idea was to lower taxes for everyone and decrease the deficit, but unfortunately that is not what took place.