Bush Tax Cuts – Yet Another Debate

President Bush speaks about his tax plan (White House)

Recently mentioned in the debates were the “Bush Tax Cuts,” a set of laws passed in 2001 and 2003 that lowered marginal tax rates for almost all taxpayers. Although the laws were set to expire in 2010, President Obama renewed them until 2012. Now the debate begins a third time as Democrats and Republicans again argue about the cuts’ proposed expiration.

Most Americans support a progressive tax system – a system where the wealthier pay a higher proportion of their income in taxes than the poor. If you are one of those supporters, then you should also favor extending the Bush tax cuts.

Wait… how is that possible? Didn’t Democrats argue that the wealthier receive a higher proportion of the Bush tax cuts? How could the cuts also have made the system more progressive?

Well, in the words of Aristotle, “There are things which seem incredible to most men who have not studied mathematics.”

Let’s look at a hypothetical example to see how this is mathematically possible, relying on statistics from Deloitte and Touche’s analysis as cited by David Rosenbaum of the New York Times in 2001. Imagine there are two families in America. According to Deloitte, in 2001, one that currently made $20,000 paid $990 (4.9%) in taxes. The other family made $1,000,000 and paid $306,842 (30.7%) in taxes. Thanks to the Bush tax cuts, the poor family saw their taxes reduced to $580, a reduction of $410 or 41%. The rich family saw their taxes reduced to $259,728, a change of $47,114 or 15%.

If we then added the two tax cut numbers together to find the total dollar amount cut, $580 + $47,114 = $47,694, we could see the statistic often cited by Democrats that the “rich received a higher percentage of the tax cut.”

In a large-scale society, there are obviously more than two families. However, not only did poor families see a higher tax cut than the rich in terms of percentage of income, but according to multiple calculations, the share of total taxes paid by the rich increased by a full percentage point, facts often cited by Republicans.

Both facts are true at the same time. Now the numbers are obviously going to be different today  – but feel free to apply the same calculations. My point is that, historically, the Bush tax cuts made the tax system more progressive. In addition, the law basically wiped away the tax bill for many low-income taxpayers!

Perhaps one of the biggest problems is that extending the cuts could cost trillions in lost revenues. This is certainly distressing, considering the state of our national debt. The Obama administration has recently been arguing to extend the Bush tax cuts for all families making under $250,000 a year, while letting the other tax cuts expire. This “soak the rich” compromise may sound appealing to some, but it does not come close to eliminating the effect on the national debt. Additionally, raising taxes in this economy could cause even slower growth.

Peter J. Wallison, the Arthur F. Burns fellow in financial policy studies at the American Enterprise Institute, says, 

Tax cuts are powerful economic stimulants, as the Kennedy, Reagan, and Bush experiences show, but reducing regulation provides the space in which a private sector—incentivized by tax cuts—can find room to pursue the innovation and risk-taking that ultimately creates jobs.”
A variation of this article was originally published in the Baylor Lariat on 10/16/12.

14 responses to “Bush Tax Cuts – Yet Another Debate

  1. Catching up on the comments, I admire your diligence as you go through the tall weeds of history and externally linked research papers. But there’s something to be said for Arthur Brooks’ attempts to ground pro-market arguments with a moral component. It’s a noble ideal to try to take in and parse all the empirical data, but there are too many holes a partisan can entrench himself in.

    Quoting you: “Perhaps one of the biggest problems is that extending the cuts could cost trillions in lost revenues.”

    Why should the Clinton rates be considered a base line for determining “lost revenue?” I feel this is ceding too much to tax hikers, or if you prefer, Democrats. As much as possible, I think pro-market folks should jettison the small peanuts talk of the Bush cuts in favor of radical tax code simplification.

    • Hmm, good thoughts. I’ve been to a few conferences with AEI people now, and Arthur Brooks’ book is one of my favorites. (I hope to intern there in the summer)

      So are you arguing we should let the Bush tax cuts for the rich expire and instead argue for broader simplification? Because I’m not altogether opposed to that idea.

      • Goodness no! The Bush cuts are worth defending in themselves, but when it comes to debates, or forums with limited time, the emphasis should be on passing radical simplification regardless of whether the “Bush cuts”/current rates are extended/maintained. But if there were to be a clear and sure path forward for passing simplification, then letting the cuts expire for higher income earners wouldn’t be so bad in the long run. Ultimately, it’s a policy-making calculation, good old sausage making.

  2. Pingback: Why Obama Is Losing Ground | Liberty's Pen·

  3. Don, you’re exactly right. Democrats blew it. “Deregulation incentivized by tax cuts” had nothing to do with this. Obama and Clinton keep talking about Bush deregulating Wall Street, as if that happened. The recession was caused by deregulation…of government programs! In simple terms, too much government with not enough oversight.

    If the banks were really at fault, why did the Obama administration pay them 100 cents on the dollar for the bad mortgages?

    Yes, housing for all is a “noble cause”. But look at the effects from pursuing those good intentions blindly.

    And of course it’s growth! Even now, the economy is “growing”, but at a rate significantly smaller than what economists say it’s “healthy”. Calling the Heritage graphs irrelevant simply because they’re a conservative source is the blind ideology you always spoke of.

  4. “Perhaps one of the biggest problems is that letting the cuts expire could cost trillions in lost revenues.”

    I love the weasel word, could. I appreciate the honesty. (smile)
    Please explain the math of that; intuitively it appears false. Is it dependent on belief in ‘trickle down?’ Short term loss of revenue followed in the long term by increased revenue?

    Wallison, American Enterprise Institute, says,
    “Tax cuts are powerful economic stimulants, as the Kennedy, Reagan, and Bush experiences show, but reducing regulation provides the space in which a private sector—incentivized by tax cuts—can find room to pursue the innovation and risk-taking that ultimately creates jobs.”
    1. I don’t know about Kennedy, and maybe you can correct me on Reagan and Bush, but I thought the national debt increased rather significantly under each of them. I also thought Reagan raised taxes four times. I also remember the senior Bush calling Reagan’s economic policies, ‘Voodoo economics” when he was running against him. I supported him over Reagan that year. When he ran again later, he said, “Read my lips, no new taxes!” Then proceeded to do so once he was elected. These two must have believed that increasing revenue through increased taxation was the best economic policy for our country’s needs at that time. Maybe a combo of increased taxation for all but the very poor combined with very significant cuts in spending is the best economic policy to pursue again.

    2. Under junior Bush, the combination of tax cuts and non-regulation (‘de-regulation incentivized by tax cuts’) of the banking industry ended up being rather disastrous for our economy. The risk-taking helped create a near depression rather than “ultimately creating jobs.”

    3. Clinton increased taxes and we had a healthy growing economy during his tenure and had a balanced budget for some of that time. If indeed trickle down works under certain conditions, it appears other policies that appear quite opposite in structure can also work.

    • Actually, you’re completely correct. That’s just a typo. It should read “EXTENDING the cuts could cost trillions…” Thanks for the catch. My fault. I’ve updated it and notified my editor as well to print a correction.

      As for the other points, I’ll take a look later. Busy night watching the debate! But thanks for your thoughts!

      • 1) Reagan – I’d have to do a lot more research. It appears he both lowered tax rates and “raised” taxes through closing loopholes. The question is the net effect, which I’m sure someone has calculated.
        2) Junior Bush didn’t “deregulate”… in fact, he created a LOT more regulation than before. It doesn’t make sense to say deregulation caused the recession. http://spectator.org/archives/2011/05/13/the-true-story-of-the-financia/
        3) As for Clinton, how do you know it was tax increases and not tax cuts that helped the economy? http://www.heritage.org/research/reports/2008/03/tax-cuts-not-the-clinton-tax-hike-produced-the-1990s-boom

        • 1. Reagan lowered income tax rates especially the top rate. However he raised capital gains rates and corporate rates (Imagine that and from a Republican president who is greatly revered). He also had a temporary gas tax and raised some other specific taxes.
          2. Junior Bush had very little regulation of the banking industry; I did not say he de-regulated.
          I usually discount ‘The true story” sources. For every such source in this particular matter there is a counter-source that puts the blame for the 2008 financial crisis squarely on the lack of regulation. For example that is what the IMF said was a major factor. What you may consider a fair critique of this lack of regulation as cause claim is found at http://shareholdersunite.com/2009/03/07/imf-regulation/
          3. Ah, ‘Heritage.org,’ the very organization that proposed an individual mandate for health insurance. (smile) They say, “Economic growth was solid but hardly spectacular in the years immediately following the 1993 tax increase.” I’ll take it. I never claimed spectacular; neither am I claiming that history equals cause. I’m only saying that tax increases do not preclude economic growth. For every conservative source there is a liberal one. Try this one about taxes and economic growth.

          • 1) Reagan, he did both, so it’s hard to tell. I’d have to do a research paper to determine which he did more.
            2) Bush called for more regulations of Fannie and Freddie, but it was opposed by Democrats. Look at the implications of the Fair Housing Standards Act. It was faulty regulation of government entitites. Even the IMF article you posted said so: “But equally, without the flood of money seeking returns, the risky financial instruments that the IMF is blaming for increasing systemic risk may not have grown and posed the risk that they did.” Democrats wanted “everyone to be able to afford a house”, regardless of whether they could or not.
            3) I’m reading the graphs on your Clinton source, and they all include the growth under Clinton as one period of “1993-1999″… the point of Heritage’s graphs is that growth between 1993-97 (after Clinton’s tax raise) and 1997-1999 (when the Republican Congress passed a tax cut) looks noticeably different. Compare….

            • No reply button at the top of your last response. So I’ll respond here.

              2. “Bush called for more regulations of Fannie and Freddie, but it was opposed by Democrats.”

              I knew you would get to that eventually. I was angry at the Democrats for approving a pre-emptive invasion of Iraq as well. This doesn’t change that this lack of regulation was a major factor for the meltdown.
              The Democrats blew it and I’m aware of only one who admitted it. However, what Republicans were asking for then sounds quite different than their general refrain now.

              “Democrats wanted ‘everyone to be able to afford a house’, regardless of whether they could or not.”

              Wanting everyone to be able to afford a house is, in my mind, a noble cause. “Regardless of whether they could or not” is, in my mind, an unfair claim. However, the Democrats did, knowingly I think, take an
              unwise financial risk. What concerns me is that Obama and our Congress have not taken enough regulatory steps to make sure this kind of thing does not happen again.

              3. It’s still growth. (Even the Heritage foundation fashioning the graph in such a way as to maximize their point could not make that disappear.) This point remains, one can increase taxes and the economy can still grow. Nor does it change the fact that what we need now is increased revenue as well as spending cuts. I’m afraid Grover Norquist has done us a disservice in persuading so many to sign the ‘no tax increase’ pledge they did.

  5. Hey there, Danny.  When I was on a newspaper staff in 9th grade, the writer of the article did not write the headline.  I think you said the same thing regarding the Lariat.  When I read the headline in the paper, (Viewpoint:  The Bush Tax Cuts – Are They Worth It) I noticed that the article did not answer that question.  What this means is that the headline is not reflecting the content of your writing – not that your writing is wrong…just that the headline is not a good fit.  Do you have any editorial control over the headlines in the Lariat in regards to your column?  Just curious. 

    Certainly the mathematics of dollar size vs. percentage is good for your readers to ponder…most of them have never been exposed to information that way, especially in regards to tax policy.   Keep up the great writing.  Andrew

    • Actually, for this headline I was specific to them that I wanted it to say “Deeper Look into the Bush Tax Cuts”. They added the “Are They Worth It?” part. Because I didn’t feel like I had enough to take a strong side, so I just wanted to share information.

      Thanks though!

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