The Bush Tax Cuts and the Economy
Thomas L. Hungerford
Specialist in Public Finance
October 27, 2010
Congressional Research Service

CRS Report for Congress
Prepared for Members and Committees of Congress

A series of tax cuts were enacted early in the George W. Bush Administration by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27). These tax cuts, which are collectively known as the Bush tax cuts, are scheduled to expire at the end of 2010. Beginning in 2011, many of the individual income tax parameters (such as tax rates) will revert back to 2000 levels. The major tax provisions in EGTRRA and JGTRRA that are part of the current debate over the Bush tax cuts are the reduced tax rates, the reduction of the marriage penalty (and increase in the marriage bonus), the repeal of the personal exemption phaseout and the limitation on itemized deductions, the reduced tax rates on long-term capital gains and qualified dividends, and expanded tax credits. This report examines the Bush tax cuts within the context of the current and long-term economic environment.

The U.S. economy entered into a recession in December 2007. Between the fourth quarter of 2007 and the second quarter of 2009, the economy shrank with real gross domestic product (GDP) falling by 4.1%. The unemployment rate increased from 4.9% in December 2007 to 10.1% by October 2009, and is currently still over 9%. As a result of reduced economic activity and government efforts to stimulate the economy, the federal budget deficit increased from 1.2% of GDP in FY2007 to 9.9% of GDP in FY2009. Most economic forecasts suggest the economic outlook over the next few months is not bright and will likely be characterized by high unemployment and sluggish economic growth. The long-term fiscal situation is unsustainable.

There are several options that Congress can consider regarding the Bush tax cuts, and each of the options strikes a different balance between fostering economic growth and restoring fiscal sustainability. Allowing the Bush tax cuts to expire as scheduled will somewhat improve the fiscal condition, but could stifle the economic recovery. At the other extreme, permanently extending all of the Bush tax cuts would not undercut the economic recovery, but would worsen the longer-term fiscal outlook and possibly signal a lack of progress in dealing with the long-term fiscal situation. The Obama Administration has proposed allowing the Bush tax cuts to expire for high income taxpayers and permanently extending the tax cuts for middle class taxpayers. Compared to permanently extending all of the Bush tax cuts, this proposal is projected to increase tax revenues by $252 billion over five years and by $678 billion over 10 years, but still leaves federal debt on an unsustainable path. A temporary extension of the Bush tax cuts could provide time for Congress to consider tax reform and also provide a deadline to complete deliberations. Furthermore, allowing the tax cuts targeted to high income taxpayers to expire as scheduled could help reduce budget deficits in the short-term without stifling the economic recovery. 10.27

Category: Taxes and Policy, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “Congressional Research Service: The Bush Tax Cuts and the Economy”

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  2. Barry, I see you still do not have a clue about Monetary Sovereignty. Warren Mosler has offered $100 million (That’s right, $100 million) to the person who can demonstrate how the federal government will not be able to pay its bills. If you are so worried about the “fiscal condition” (whatever that means), you immediately should go to Warren’s site and collect that money.

    Either that, or stop printing your debt-hawk nonsense. As the kids used to say, “Put up or shut up.”

    Rodger Malcolm Mitchell

  3. Permabear says:

    The Federal government can pay its bills all right. But if you print a zillion dollars, those bills won’t be worth the ink their printed on. Zimbabwe has “monetary sovereignty”. How about using Zimbabwe as an example of how out of control debt can’t effect an economy? Or more immediately how about Greece? The idea that debt doesn’t matter because you can always print your way out of it is patently ridiculous.

    Japan has been able to escape the massive debt to gdp ratio because they are a nation of savers and they fund their debt internally. Around 95 percent of Japanese debt is held by Japanese citizens. About 50 percent of U.S. debt is held by foreigners, of which China is the biggest holder. If China decides to play its bond selling card, interest rates skyrocket and the U.S. is dust in the wind. Yes, monetary sovereignty will save us all right. Hand over the $100 million.

  4. warrenmosler says:

    First, I was instrumental with regard to the Bush tax cuts. I visited with Andrew Card in the West Wing in early 2003 and first discussed why the low interest rates hadn’t worked and were not likely to work (interest rate channels work against rate cuts adding to aggregate demand. See Bernanke, Sacks, Reinhardt 2004). We then discussed how much of a fiscal adjustment was needed to reverse the negative effects of the prior surplus years, which was about 200 billion per quarter. Card agreed, and a week later Bush made his then famous remark when asked about deficits- “I don’t look at numbers on a piece of paper, I look at jobs!”
    He then went on to not veto a single spending bill (the conservatives still haven’t forgiven him) and got in every possible tax cut he could, including retro cuts. The q3 deficit go to about $200 billion, the economy turned, and it didn’t cost him the election.

    Second, federal taxes serve to regulate the economy (aggregate demand) and not to collect revenue per se. This should be obvious when you consider that if you pay your taxes(or buy tsy securities) with old $20 bills the give you a receipt, then throw the bills in a shredder.

    (States, corps, and individuals wouldn’t do that, only the issuer of the currency for which something very different is going on.)

    So for a given size govt, if taxes are way too low you get inflation from excess demand.
    If taxes are way too high you get high unemployment and a massive output gap like we have to day.

    So right now my first proposal is a full payroll tax (FICA) holiday for employees and employers.
    Federal taxes are like a thermostat. And right now the economy is ice cold and needs a tax cut to warm it up.

    Also, the fear of being the next Greece is causing us to become the next Japan. Greece and the other euro zone member nations have put themselves in a position much like the US states. California, Illinois, or CT can be the next Greece, but not European Central Bank, or the central govt. of the US, UK, or Japan.

    Warren Mosler
    CT Independent Party candidate for US Senate

  5. Permabear,

    Perhaps you should have familiarized yourself with the Zimbabwe situation before you used that nation as an example of what could happen to the United States. Civil war, Robert Mugabe, confiscation of land and repeated droughts all caused inflation. Then printing money (rather than the correct resonse — raising interest rates) sent the inflation into hyperinflation.

    Hyperinflation seldom is caused by money printing. In fact, hyperinflation causes money printing. Since 1971, when we went off the gold standard, there has been zero relationship between federal spending and inflation. (See: CAUSE OF INFLATION

    Despite our deficit stimulus spending, we are close do deflation. That old debt-hawk myth about deficits causing inflation simply is not supported by the facts. But then, who ever said debt hawks pay any attention to facts?

    Rodger Malcolm Mitchell

  6. My friend, Warren Mosler has an excellent comment, two spaces above. If you are interested in more information about his suggestion to end FICA, go to 10 Reasons To End FICA . Warren helped me with that post.

    Rodger Malcolm Mitchell