Bush Tax Cuts - Debate Over Effect of Cuts

Debate Over Effect of Cuts

There was and is considerable controversy over who benefited from the tax cuts and whether or not they have been effective in spurring sufficient growth. Supporters of the proposal and proponents of lower taxes say that the tax cuts increased the pace of economic recovery and job creation. Further, proponents of the cuts asserted that lowering taxes on all citizens, including the rich, would benefit all and would actually increase receipts from the wealthiest Americans as their tax rates would decline without resort to tax shelters. The Wall Street Journal editorial page states that taxes paid by millionaire households more than doubled from $136 billion in 2003 to $274 billion in 2006 because of the JGTRRA.

The Heritage Foundation concludes that the Bush tax cuts led to the rich shouldering more of the income tax burden and the poor shouldering less; while the Center on Budget and Policy Priorities (CBPP) has concluded that the tax cuts have conferred the "largest benefits, by far on the highest income households." CBPP cites data from the Tax Policy Center, stating that 24.2% of tax savings went to households in the top one percent of income compared to the share of 8.9% that went to the middle 20 percent. The underlying policy has been criticized by Democratic Party congressional opponents for giving tax cuts to the rich with capital gains tax breaks while acknowledging some benefit extended to middle and lower income brackets as well.

Statements by President Bush, Vice President Dick Cheney, and Senate Majority Leader Bill Frist that these tax cuts effectively "paid for themselves" have been disputed by the CBPP, the U.S. Treasury Department and the CBO. Economist Paul Krugman wrote in 2007: "Supply side doctrine, which claimed without evidence that tax cuts would pay for themselves, never got any traction in the world of professional economic research, even among conservatives." Since 2001, federal income tax revenues have remained below the 30-year average of 8.4% of GDP with the exception of 2007, and did not regain their year 2000 dollar peak until 2006, though reasons for regaining previous levels are not given (see chart at right).

Some policy analysts and non-profit groups such as OMBWatch, Center on Budget and Policy Priorities, and the Tax Policy Center have attributed much of the rise in income inequality to the Bush administration's tax policy. In February 2007, President Bush addressed the rise of inequality for the first time, saying "The reason is clear: We have an economy that increasingly rewards education and skills because of that education."

Critics state that the tax cuts, including those given to middle and lower income households, failed to spur growth. Critics have further stated that the cuts also increased the budget deficit, shifted the tax burden from the rich to the middle and working classes, and further increased already high levels of income inequality. Economists Peter Orszag and William Gale described the Bush tax cuts as reverse government redistribution of wealth, " the burden of taxation away from upper-income, capital-owning households and toward the wage-earning households of the lower and middle classes." Supporters argued that the tax brackets were still more progressive than the brackets from 1986 until 1992, with higher marginal rates on the upper class, and lower marginal rates on the middle class than established by either the Tax Reform Act of 1986 or the Omnibus Budget Reconciliation Act of 1990.

Economist Simon Johnson wrote in 2010: "The U.S. government doesn’t take in much tax revenue—at least 10 percentage points of GDP less than comparable developed economies—and it also doesn’t spend much except on the military, Social Security and Medicare. Other parts of government spending can be frozen or even slashed, but it just won’t make that much difference. That means older Americans are going to get squeezed, while our ability to defend ourselves goes into decline. Just because there’s a bipartisan consensus on an idea, such as tax cuts, doesn’t mean it makes sense. Today’s tax cutters have set us up for tomorrow’s fiscal crisis and real damage to U.S. national security."

A Washington Post article takes a different view, saying that data showed the biggest contributor to the disappearance of projected surpluses was increased spending, which accounted for 36.5 percent of the decline in the nation’s fiscal position, followed by incorrect CBO estimates, which accounted for 28 percent. The Bush tax cuts (along with some Obama tax cuts) were responsible for just 24 percent.

The New York Times stated in an editorial that the full Bush-era tax cuts were the single biggest contributor to the deficit over the past decade, reducing revenues by about $1.8 trillion between 2002 and 2009.

CBO estimated in June 2012 that the Bush tax cuts (EGTRRA and JGTRRA) added about $1.6 trillion to the debt between 2001 and 2011, excluding interest.