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Are the Bush Tax Cuts Working?
President Bush has signed into law three tax bills in the past three years; these tax cuts amounted to $1.3 trillion in 2001, $96 billion in 2002, and $330 billion in 2003. Democratic opponents criticized the tax cuts (particularly the first one in 2001) as fiscally irresponsible and weighted primarily toward the wealthy, while Republican supporters claimed that the tax cuts would stimulate economic growth and return money to taxpayers across the board.
Major Provisions of the Tax Cuts
The 2001 Economic Growth and Recovery Tax Act, by far the largest of the three tax cuts, was intended to provide tax relief to individuals, families and businesses, thereby stimulating economic growth enough to recover from the recession (which ended in November 2001). Some provisions of that bill include the following:1
* Rebate checks were sent to taxpayers in the amount of $300 per individual and $600 per married couple.
* Personal income tax rates dropped from 39.6, 36, 31, and 28 percent to 35, 33, 28, and 25 percent, respectively.
* The child tax credit increased from $500 to $600 (effective 2001), and will increase to $1,000 by 2010.
* The standard deduction for married couples increased to equal twice that of single taxpayers.
* The estate tax would be repealed in 2010.
* Contribution limits for various tax-favored savings accounts (for retirement, education, etc.) were increased.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerated many of those provisions and cut tax rates on dividends and capital gains-small-business equipment write-off amounts were also increased:2
* Effective 2003-2008, the maximum tax rate on qualified dividends will be 15 percent (formerly, dividends were taxed at the same levels as ordinary income).
* The rate on long-term capital gains from sales after May 6, 2003, dropped from 20 percent to 15 percent.
* Many small businesses can instantly deduct 100 percent of most new and used business assets (up to $100,000).
How Has the Economy Changed Since the Tax Cuts?
GDP Growth
After the recession in 2001 and the first round of tax cuts, economic growth speeded up and is expected to pickup even faster in 2004:3
* The real annual GDP growth rate increased from 0.3 percent in 2001 to 2.5 percent in 2002.
* In the third quarter of 2003, GDP grew at a 7.2 percent annual rate.
* Forecasters are expecting GDP to grow by 4.6 percent in 2004, the highest in 20 years.
* 2003 and 2004 economic growth levels surpassed Congressional Budget Office (CBO) estimates by 150 basis combined, resulting in $300 billion of additional growth, which is roughly $2,500 per household.
Employment, Jobs, and Productivity4
Though job creation was slow immediately following the recession and during the first stages of the recovery, it had increased dramatically by late 2002 and 2003.
* 1.4 million jobs were added in the nine months after August 2003 (the 2003 tax cuts were signed into law in late May 2003).
* The unemployment rate remained steady at 5.6 percent in May 2004, well below its peak of 6.3 percent a year ago.
* The Treasury Department estimates that without the tax relief, as many as 1.5 million more Americans would be out of work right now, and the unemployment rate would be well over 7 percent.
The job growth statistics are particularly noteworthy because of greater-than-expected increases in productivity levels-high rates of productivity tend to mean less employment:
* Productivity grew at a 4.6-percent annual rate in the first quarter of 2004, continuing the trend of large gains in productivity since 2001 due to investments in equipment and technology.
* Higher productivity increases incomes and keeps inflation in check.
Furthermore, unemployment claims are at their lowest since the 2001 recession. The high rates of job growth matched with high rates of productivity point to the overall strength of the economy.
Investment, Spending and Inflation5
Consumer spending is on the rise, as is business investment. Economists credit the tax cuts for some of this growth-taxpayers' disposable income rose after receiving their rebates and businesses increased their inventory to meet increased demand.
* Consumers' real disposable income has increased by more than 10 percent during the first 13 quarters of the Bush administration, compared to only 7 percent during the same period of the first Clinton administration.
* Business investment increased at a 5.8-percent annual rate in the first quarter of 2004.
Though inflationary pressures have risen recently in response to increased business and consumer spending, inflation is low by historical standards:
* The personal consumption expenditure index (the Fed's preferred inflation gauge) rose by 1 percent for an annual 3 percent inflation rate, but when volatile food and energy prices are removed from the index, the inflation rate is only 1.7 percent annually.
* However, personal income growth is growing as well, so inflationary pressure is easier for the average worker to bear.
Dividend Payouts
A study on dividend payouts before and after the 2003 tax cut for all Standard & Poor's 500 companies showed a highly positive response to the tax cut:6
* Annual dividends paid by S&P 500 companies rose from $146 billion to $172 billion, an increase of $26 billion.
* In addition, special dividends of $7 billion have been paid, raising the total first-year dividend increase to $33 billion.
* Thus, dividends increased 18 percent without special dividends and 23 percent with special dividends.
* About 22 companies that did not previously pay dividends have initiated regular dividends.
* Equity values rose more than $2 trillion after the tax cut.
* Since 2003, nearly 19 companies have instituted a dividend payment for the first time, and almost 9 percent more companies paid out dividends after the tax cut than before the tax cut.
* Dividends payments to taxpayers increased from an average of $410 in the second quarter of 2003 to $518 in the third quarter of 2005.
* The overall payout of dividends in 2005 was over 36.5 percent higher than the payout before the 2003 tax cut and dividend income increased by a similar margin after the 2003 cut, from $750 to $1,000.
The large and positive response to the dividend tax cut, which is scheduled to expire at the end of 2008, suggests that Congress should make it permanent.
Capital Gains7
* In 1993, 14.5 million Americans claimed capital gains income, by 2003, the number had grown to 21.9 million Americans -- a 51 percent increase -- and the percent of all taxpayers reporting capital gains income increased from 12.6 percent to 16.8 percent, respectively.
* Taxpayers claimed an average of $12,283 in capital gains income in 2003, and shareholder wealth increased by more than $5 trillion.
The Bush Tax Cuts Are Working
The three Bush tax cuts have offered tax relief to every American taxpayer and businesses as well. Individuals and families kept more of their own income and tended to spend it or invest it, which led to impressive economic growth. Tax relief also lowered the cost of capital, making it easier for businesses to expand, increase profits, and hire more workers. Nearly all economic indicators show that we have recovered from the 2001 recession and are in a period of economic expansion.
Unfortunately, many of the Bush tax cut provisions have "sunset clauses" and will expire soon. Nearly all elements of the 2001 Economic Growth and Recovery Tax Act will expire in 2011 if legislators do not make them permanent. If that doesn't happen, taxpayers will face the largest tax increase in the nation's history.
That tax increase raises three legitimate concerns:8
* Higher taxes encourage additional spending; there is no fixed relationship between taxes and spending, but history suggests that tax increases almost surely have the effect of loosening the reins on government spending.
* Higher tax rates hurt competitiveness and growth ; all tax increases cause economic harm because they encourage bigger government but some types of tax increases do more economic damage than others, specifically, higher marginal tax rates on work, saving, and investment reduce incentives to engage in productive behavior.
* The tax rates/tax revenue downward spiral ; if the Bush tax cuts are not extended and the economy is hit by a sizeable increase in marginal tax rates, economic performance will falter, and this translates into fewer jobs, lower incomes, and diminished profits, and that means less money for the government to tax.
Even though, H.R. 4297 is a step in the right direction and the tax cuts have spurred investment, job creation, and economic growth, repealing any part of them would be damaging to American taxpayers on an individual level and to the economy as a whole. Even if Congress allows a tax cut to expire in 2011, investors will respond by locking up their money in short-term projects rather than long-term ones. The U.S. economy is strong, but could become stronger if the Bush tax cuts are made permanent.
Moreover, according to the Congressional Budget Office's "Budget and Economic Outlook for 2006":9
* Before the 2003 cut was enacted capital-gains tax liabilities were estimated to be $60 billion 2004 and $65 billion in 2005, for a two-year total of $125 billion.
* But after the cut, liabilities were lowered to $46 billion in 2004 and $52 billion in 2005, for a two-year total of $98 billion.
* Actual liabilities from capital-gains taxes were $71 billion in 2004 and $80 billion in 2005, for a two-year total of $151 billion.
* Instead of costing the government $27 billion in revenues, the tax cuts actually earned the government $26 billion extra.
The Heritage Foundation also found that overall payout of dividends in 2005 was over 36.5 percent higher than the payout before the 2003 tax cut, and dividend income increased by a similar margin after the 2003 cut, from $750 to $1,000.10 Taxpayers also claimed an average of $12,283 in capital gains income in 2003, and shareholder wealth increased by more than $5 trillion.
In May 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 (H.R. 4297) into law which extend the current tax cuts. His signing assures that millions of taxpayers and millions more workers and business owners will enjoy low tax rates on capital gains and dividends and a potentially stronger economy through 2010. Overall, extending JGTRRA's preferential rate structure on capital gains and dividend income will have small -- but positive -- effects on both gross domestic product (GDP) and employment. Personal consumption and business fixed investment are also likely to post modest gains as a result of H.R.4297 because it is only a temporary extension of an expiring provision.11
* H.R. 4297's capital gains and dividend provisions are likely to influence economic activity by increasing personal disposable income by lowering federal tax payments and reducing the cost of capital to businesses by raising the value of U.S. equities.
* Most immediately, H.R. 4297's capital gains and dividend provisions will lower income tax payments; extending JGTRRA's rate structure on capital gains and dividend income will reduce federal tax revenues by a total of some $18 billion in fiscal years 2009 and 2010 and over $50 billion between fiscal years 2008 and 2016.
* This will likely boost personal consumption and business fixed investments over the medium term; this effect is also likely to be largest for the extension of JGTRRA's preferential tax rates on capital gains realizations.
Conclusion: Make the Bush Tax Cuts Permanent
In January 2006, the White House economic team began the push to make the 2001 and 2003 tax cuts permanent because the tax policy program has been shown to help the United States economy to thrive, with steady job creation and strong economic growth.
If the tax cuts of 2001 and 2003 are allowed to expire, millions of working families will see their economic prospects dim, their job opportunities diminish and economic uncertainty rise. Moreover, taxes will rise dramatically for most taxpayers. Between now and January 1, 2011:12
* Tax rates will rise substantially in each tax bracket, some by 450 basis points and low-income taxpayers will see the 10-percent tax bracket disappear, and they will have to pay taxes at the 15-percent rate.
* Married taxpayers will see the marriage penalty return and taxpayers with children will lose 50 percent of their child tax credits.
* Taxes on dividends and capital gains will increase beginning on January 1, 2009 and federal death taxes will come back to life in 2011, after fading down to nothing in 2010.
However, if Congress makes the tax cuts permanent, the major economic benefits begin in 2011. According to the Center for Data Analysis at the Heritage Foundation:13
* Significant economic gains will occur throughout the period from 2006-2014, particularly after 2008.
* For example, making certain that taxes on investment remain low will add about 285,000 jobs per year in fiscal years 2008 and 2009.
* In those two years alone, lower taxes on capital gains and dividends mean an additional $70 billion in economic output and an additional $110 billion in disposable income for households.
* On average, total employment will rise by 1,087,000 jobs per year, and after inflation, annual GDP will be over $111 billion higher.
* Personal savings will grow by $163 billion per year, on average, after inflation.
* After-tax household income will grow by an annual average of $274 billion per year, after inflation.
1. "What the Tax Cut Compromise Means to You," Associated Press, May 26, 2001.
2. Bill Bischoff, "What the Bush Tax Cut Means to You," SmartMoney.com, May 27, 2003.
3. Daniel Clifton, "ASA Letter to Make Capital Gains and Dividend Tax Cuts Permanent," American Shareholders Association, July 13, 2005.
4. "A Jobless, Sluggish Economic Recovery? The Facts Say Otherwise," Republican Policy Committee, June 4, 2004.
5. Ibid.
6. Stephen Moore and Phil Kerpen, "Show Me the Money! Dividend Payouts after the Bush Tax Cuts," Cato Institute, October 12, 2004.
http://www.cato.org/pub_display.php?pub_id=2478 7. Rea S. Hederman, Jr. and William W. Beach, "Make the Dividend and Capital Gains Tax Rates Permanent to Keep the Economy Growing," Heritage Foundation, February 16, 2006.
http://www.heritage.org/Research/Taxes/bg1914.cfm 8. Daniel J. Mitchell, Ph.D., "The President's Tax Agenda: Pro-Growth Measures Jeopardized by Excessive Spending and Misguided Focus on Deficit," Heritage Foundation, February 7, 2006;
http://www.heritage.org/Research/Taxes/wm992.cfm 9. Congressional Budget Office, "The Budget and Economic Outlook: Fiscal Years 2006 to 2015," CBO, January 2005.
http://www.cbo.gov/showdoc.cfm?index=6060&sequence=0 10. Rea S. Hederman, Jr. and William W. Beach, "Make the Dividend and Capital Gains Tax Rates Permanent to Keep the Economy Growing," Heritage Foundation, February 16, 2006.
http://www.heritage.org/Research/Taxes/bg1914.cfm 11. Tracy L. Foertsch, "A Victory for Taxpayers and the Economy," Heritage Foundation, May 17, 2006.
http://www.heritage.org/Research/Taxes/wm1082.cfm 12. William W. Beach and Rea S. Hederman, Jr., "Make the Bush Tax Cuts Permanent," Heritage Foundation, January 5, 2006.
http://www.heritage.org/Research/Taxes/wm956.cfm 13. Ibid.
