The Bush Tax Cuts

Dear George,

There have probably have been more painful times politically in the U.S. in the last fifty years (e.g., the Vietnam War era, Watergate, Reagan), but the last two years seem like the ugliest in recent memory. This can mostly be attributed to to the rightwing backlash against President Obama and the election of extremist Tea Party-supported Republican candidates to Congress. It all seemed to come to a head in the recent political crisis regarding raising the debt ceiling. I could barely stand to listen to the news, but I also decided it’s important to try to better understand what’s going on. Democrats and Republicans were most polarized in their stances toward ending the soon-to-expire tax cuts that George W. Bush put in place during his first term. Obama proposed retaining the Bush tax cuts for middle and lower income earners, but returning to Clinton-era tax rates for high income people (i.e., individuals over $200,000; couples over $250,000). This would have meant tax increases for about 2% of the population (for the highest bracket, an increase from 35% to 39.6%). Republicans objected strenuously, vowing to maintain tax cuts for the wealthy at all costs and arguing that the Bush tax cuts should be made permanent for all taxpayers. With the Republicans threatening economic chaos by blocking an increase to the federal debt ceiling, Obama reached a compromise with Republicans in Congress to extend the cuts for two more years for the rich and for everybody else. Many Democrats responded with outrage at what they saw as Obama’s caving in to Republican obstructionism. So what’s this all about?

What are the Bush tax cuts?

The George W. Bush administration, with the aid of Congress, implemented changes in the U.S. tax code in 2001 and 2003 that lowered federal income taxes for nearly all taxpayers. For example, tax rates for a middle income category ($34,500 to $83,600) dropped from 28% to 25%. Tax rates for the highest income bracket ($379,150 and above) dropped from 39.6% to 35%. The cuts also lowered taxes on dividends and capital gains; reduced estate taxes; lowered tax burdens on parents, married couples, and the working poor; and increased tax credits for retirement savings and education. (13) (4) [Note: Numbers in parentheses refer to sources cited at end.]

How have economists reacted to the Bush tax cuts?

Most U.S. economists opposed the Bush tax cuts (18). At the time of the legislation, 450 economists, including ten Nobel Prize winners, sent a statement to President Bush saying that “these tax cuts will worsen the long-term budget outlook… will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research… [and] generate further inequalities in after-tax income.” (18) All of these predictions appear to have been borne out. Despite Republicans’ rejection of tax cuts as a means of helping to reduce the Federal deficit, most economists agree that it’s impossible to maintain the Bush tax cuts and reduce the Federal deficit by spending cuts alone. As the New York Times puts it, “There is no economically sensible or politically honest way to address the deficit without also increasing revenues and reforming the tax code.” (6)

Who has benefited most from the Bush tax cuts?

People at all income levels have had more disposable income as a consequence of the Bush tax cuts. While economists’ opinions vary, many conclude that the rich have benefited the most. According to the Christian Science Monitor (2), a middle-income family ($52,224 per year) has obtained a take-home pay increase of $1,016 (2.4%) as a consequence of the Bush tax cuts. Persons in the top 1%, however, have enjoyed an increase of $72,872 (5.9%). The Center on Budget and Policy Priorities concluded that the Bush tax cuts yielded the “largest benefits, by far, on the highest income households.” (13)

How have the Bush Tax Cuts affected the national debt?

Members of the Bush administration predicted that the tax cuts, because they would stimulate the economy and create jobs, would pay for themselves. This did not happen. The country’s last financial surplus was in 2001 at the end of Clinton’s presidency. From 2001 to 2009 government spending increased from 18.2% of the Gross Domestic Product (hereafter, GDP) to 24.7%, while taxes declined from 19.5% to 14.8% of the GDP. Relative to the GDP, this was the highest level of spending and the lowest level of taxation in 40 years. (19) Due to a combination of tax cuts and the wars in Iraq and Afghanistan, the U.S. national debt grew substantially during Bush’s presidency (2001-2008), both in sheer dollars and relative to the size of the economy, and it has continued to grow under Obama. (19) In 2001 the Congressional Budget Office forecasted a surplus of $2.3 trillion by 2011. Instead, according to the Pew Center, the national debt in 2011 is approximately $10.4 trillion, most of that due to recessions and the effects of Bush’s policies. (19)

How has income inequality in the U.S. changed over recent decades?

Income inequality in the U.S. has been increasing since the 1970s. Among wealthy countries, the U.S. has the highest level of income inequality (i.e., the greatest gap between the rich and the poor), and it has experienced the greatest increases in income inequality over the last 20-30 years. There are more millionaires in the U.S. than in any other country (236,883 households), and the U.S. has a higher proportion of citizens living in poverty than a majority of Western countries. (16) The growth of income in the U.S. has been heavily concentrated in the top 1% (i.e., the super rich). Real income between 1979 and 2005 increased 176% for the top 1%; 15% for the bottom 60%. During the Bush years, only 4% of earners enjoyed increases in real income, and these were mostly high income earners. In 2005, for example, income increased by 14% for the top 1% and decreased slightly (0.6%) for the bottom 90%. (20) The poverty rate, on the other hand, increased from 11.2% to 13.2% between 2000 and 2008. (12) (ww8) As of 2004, the wealthiest 25% of US households owned 87% of the wealth in the country; the poorest 25% owned 0% of the country’s wealth. (20)

What is the argument for extending the Bush tax cuts?

It’s argued that in the currently weak economy raising taxes could reverse our economic growth. If tax bills go up, Americans will have less money to spend and invest in the economy, and that could erase whatever economic ground has been recovered to date. (4)

How would the national debt be affected by extending the Bush tax cuts?

Many economists believe that spending cuts by themselves cannot reduce the national debt and that increased tax revenues will be necessary as well. The non-partisan Pew Charitable Trusts recently made the following estimates: (a) If the tax cuts were made permanent for all taxpayers at all income levels, this would increase the national debt by $3.3 trillion over the next ten years. (b) If the tax cuts were extended only to individuals making less than $200,000 and couples earning less than $250,000, the national debt would increase by $2.2 trillion over the next ten years. (c) If the tax cuts were extended for all taxpayers for two years only and then ended, the national debt would increase by $561 billion over the next ten years. (13)

Who would be negatively affected if the Bush tax cuts are made permanent?

Compared to other countries, government spending in the U.S. is comparatively low except for Social Security, Medicare, Medicaid, and the military. Spending cuts in these domains, in the absence of increased tax revenues, will disproportionately harm the elderly, minorities, and the poor, as well as reducing resources available for national security. (12)

Do Americans pay higher taxes than citizens of other advanced economies?

No, just the opposite. Tax rates in the U.S. are lower than those in nearly all other advanced industrial economies. In the Group of Seven large industrial economies, Japan and the U.S. are tied for the lowest ratio of tax revenue to the Gross Domestic Product. (3) In 2006 U.S. taxes were lower than 26 of the 30 member countries of the Organization for Economic Co-operation and Development. U.S. taxes of all types claimed 28% of the GDP, compared with an average of 36% for the 30 OECD member countries. Only Mexico, Turkey, and Korea had lower taxes than the U.S. (9)

Do rich people in the U.S. pay higher taxes than in the past?

No. According to an Associated Press report (Seattle Times, 4/17/11), the wealthiest families in America are paying substantially lower taxes than they did a couple of decades ago. (8) In 1950 the tax rate for those earning $200,000 or more was 91%. In 1980, when Reagan became president, individuals earning over $108,300 had a federal income tax rate of 70%. Reagan cut the tax rate to 50% and then to 28% in 1987. George H.W. Bush and Clinton then raised taxes; George W. Bush lowered them again. (8) In 2007 the average worker in the U.S. earned $26,000 in annual income and paid 23.4% of that in income and payroll taxes. Americans in the Top 400 of the income distribution made an average of $344,759,000 per year and paid 18.7% of that in income and payroll taxes. Though the highest income tax rate is 36%, there are so many tax breaks and loopholes available that the super rich, on average, pay about half that amount. (8) Thus, on a proportion of income basis, average workers’ burdens were about 25% higher than those of the Top 400. (12)

Where does the American public stand on the issue?

According to a recent New York Times/CBS Poll, 63% favor helping to address the federal deficit by raising taxes for households that earn over $250,000 a year. (6)

My conclusions

There are no absolute, hard-and-fast answers in these political, economic, and social policy domains, and reasonable people can differ in their conclusions. Given that caveat, my personal opinions after digging around in this material can be expressed in terms of six conclusions:

(1) The Bush tax cuts are one influential factor contributing to an immense and unsustainable federal debt.

(2) The Republicans’ insistence on addressing that debt problem exclusively through government spending cuts is unrealistic and harmful.

(3) There are enormous economic disparities in the U.S. which have increased substantially in the last four decades, and the Bush tax cuts have further accelerated those huge gaps between the rich and the poor.

(4) Tax rates for the richest Americans are substantially lower than in other advanced countries and substantially lower than they have been historically in the United States.

(5) Keeping the Bush tax cuts in place for the super-rich and addressing the federal deficit through spending cuts alone means that much of the economic burden would fall upon the poor, minorities, and the elderly.

(6) I personally think that President Obama’s proposal to maintain tax cuts for lower and middle income people and to return to Clinton-era tax rates for the highest income brackets is a pragmatic, fair, and rational approach.

Love,

Dave

P.S. Usually this blog likes to contain some humor. This topic doesn’t seem that humorous.

ONLINE SOURCES CITED:

(1) www.bargaineering.com (“Official 2011 US Income Tax Brackets (IRS Tax Rates)”; 1-10-11)

(2) www.csmonitor.com (“Bush tax cuts 101: What changes could be in store for taxpayers?”; 9-13-10)

(3) www.csmonitor.com (“US tax bite smaller than other nations’”; 4-11-10)

(4) www.money.cnn.com (“Bush tax cuts: What you need to know”; 9-15-10)

(5) www.nytimes.com (“Bush era tax cuts”; 12-17-10)

(6) www.nytimes.com (“The truth about taxes”; 8-6-11)

(7) www.nytimes.com (Warren E. Buffett, “Stop coddling the super-rich”; 8-14-11).

(8) www.seattletimes.nwsource.com (“Super rich see federal taxes drop dramatically; 4-17-11)

(9) www.taxpolicycenter.org (“The Numbers: How do U.S. taxes compare internationally?”; 3-16-10)

(10) www.washingtonpost.com (“5 myths about the Bush tax cuts”; 9-1-10)

(10) www.welkerswikinomics.com; “Tax progressivity in the US”; 9-16-10)

(12) www.wweek.com (“9 things the rich don’t want you to know about taxes”; 4-13-11)

(13) www.wikipedia.org (“Bush Tax Cuts”)

(18) www.wikipedia.org (“Economic policy of the George W. Bush administration”)

(20) www.wikipedia.org (“Income inequality in the United States”)

(14) www.wikipedia.org (“List of countries by income inequality”)

(15) www.wikipedia.org (“List of countries by percentage living in poverty”)

(16) www.wikipedia.org (“Number of millionaires by country”)

(19) www.wikipedia.org (“United States public debt”)

(20) www.wikipedia.org (“Wealth in the United States”)

G-mail Comments

-Vicki L (to her friend April; 8-27): Hi April, I'm sending along one of my brother David's (uncharacteristic) blogs - just in case you're in a political snit and need to draw on some statistics to give someone a good talking to. (My sense, though, is you're in a harvesting and canning phase - how much more fun.) Love, Vicki

-Gayle C-L (8-25): David Darling, Such wonderful information. You should be President. After all you are the perfect age. You have an extremely clean record a perfect wife. A perfect son and daughter in law and babies. You are extremely smart Kind. A great sense of humor. You come from

A great family Farm Included.. And most importantly cute:)) Given all of that .. In case you decide to run... I will just have to be your publicist .:())) Think about it. I m sure you are more qualified any other candidate that will soon run:)

Lots of love. G