The phrase Bush tax cuts refers to changes to the United States tax code passed originally during the presidency of George W. Bush. The 2001 act and the 2003 act significantly lowered the marginal tax rates for nearly all U.S. taxpayers. There is considerable controversy over who benefited from the tax cuts and whether they have spurred growth.
From the crippling dot-com bust and terrorist attacks of 2001 until the tax cuts of 2003, real gross domestic product growth hobbled along at an average of just 1.8 percent per year. Far from further weakening this performance, the Bush tax cuts increased real GDP growth to 2.78 percent per year through 2007, when the housing bubble burst.
Rather than increasing the deficit by reducing revenues, the Bush tax cuts actually increased revenues, reducing the deficit. Before the tax cuts, federal tax receipts had been falling an average of 4.14 percent per year. The Bush tax cuts reversed this trend: by cutting tax rates, they increased tax revenues by a remarkable average of 9.62 percent per year. As a result the deficit, which had hit $378 billion before the tax cuts, was slashed by more than two-thirds during this period.
By pinpointing his tax increase on incomes over $200,000, President Obama has maximized the detrimental impact that his tax increase would have on job creation. A higher tax bill would deprive the most successful flow-through employer-businesses of resources they would otherwise plow back into their business. These investments would allow them to compete for more business and create more jobs in the process.
Higher marginal tax rates would also reduce the incentive for these important job creators to expand and take on risk with their remaining resources, because the higher rates would reduce the return that the owners of the businesses could expect to earn from their investment. This would further deter job creation.
Let’s concede for the sake of argument that Federal tax receipts wouldn’t plummet after the institution of the tax hike on those hiring. How does a proposed tax hike that would have a negligible impact on the deficit or $15 trillion debt and offers absolutely nothing to the private sector — unless the president is revving up his autopen to cut everyone checks — going to help job creation?
The two top income tax rates would have increased by nearly 20%, counting Obama's proposed phaseouts of deductions and exemptions. The capital gains tax would have increased by nearly 60%, counting the new Obamacare tax on investment income. The tax rate on dividends would have nearly tripled, counting the new Obamacare tax as well. The Medicare payroll tax would have increased by over 60% for the targeted income earners. The death tax would have risen from the grave with a 55% top rate, if the Bush tax cuts simply expired.
Yet, in 2007, even before Obama became President, official IRS data shows that the top 1% of income earners paid more in federal income taxes than the bottom 95% of income earners combined. The top 3%, to which Obama's across the board tax rate increases would apply, paid more than the bottom 97% combined. Yet, President Obama was still committed to his left wing extremist tax piracy policy of increasing the tax rates of virtually every major federal tax on this one small sliver of taxpayers.
At the time I wrote in this space that the tax cut extension would allow breathing room for the long overdue economic recovery to finally sprout this year. And sure enough, that is exactly what has happened, with unemployment falling to 8.9% since then. But President Obama is now working on the Coming Crash of 2013, which will be the result on our current course if he is reelected.
Poorest Americans have been the largest beneficiaries, on a percentage basis, of the Bush tax cuts. The lowest quintile went from a 6.4% average effective rate to a 4.0% average effective rate - a 40% tax cut. The top quintile went from a 28% to a 25.1% average effective rate - only a tax cut of 10%. Want a more regressive tax code? Repeal the Bush tax cuts!
But there is some tension between the site’s critique and conservative tax policy. Part of the reason that over 40 percent of Americans don’t pay taxes is because of the continual push to lower them — a cause that conservatives have championed. For example, while the Bush-era tax cuts benefited the wealthy, they also lowered taxes at every income level, making it “relatively easy for families of four making $50,000 to eliminate their income tax liability,” as the Associated Press notes. Ronald Reagan’s tax cuts, similarly, took many lower-income Americans off of the tax rolls, an accomplishment about which the Gipper was quite proud.
Senate Republican Leader Mitch McConnell's office immediately panned the president's plan as a "call for tax hikes on small businesses."
The office noted that Obama said two years ago that letting the rates go up would be bad for the economy. On "CNN's State of the Union" Sunday, McConnell noted, "We have a slower growth rate today than we had then."
House Speaker John Boehner offered a similar rebuke, accusing Obama of "doubling down on his quixotic call for the same small businesses tax hikes that have been routinely rejected by the House and Senate."
The deal has several key features. It reduces payroll taxes, extends unemployment benefits and keeps current tax rates intact. So far, so good. But intermixed with the benefits are considerable costs of consequence. Given the unambiguous message that the American people sent to Washington in November, it is difficult to understand how our political leaders could have reached such a disappointing agreement. The new, more conservative Congress should reach a better solution.
The deal keeps current tax rates from rising to pre-Bush era levels for two years. But in 2013, unless Congress acts again, rates will increase dramatically.
In a free society under a constitution founded on the principle that government’s primary responsibility is to preserve individual liberty, the default should always be more freedom and less government intervention. The burden should always be on government to justify its impositions on individual liberty. The Supreme Court has long recognized this basic understanding in the form of what it describes as strict scrutiny of laws that limit fundamental constitutional rights. Under strict scrutiny, the burden is on the government to justify constraints on liberty.
Although the Supreme Court has created a false distinction between personal and economic liberties by way of lessening the burden on government to justify economic regulations, members of Congress committed to liberty should hold themselves to a high standard in justifying both regulatory and tax impositions on those they represent. Sun-setting regulations promote liberty. Temporary tax cuts threaten liberty.
The uncertainty over the Bush tax cuts already has caused a number of business leaders to threaten a hiring freeze and a dampening of investment until they can figure out the after-tax cost of capital and the rate of return on investment. Hiring has slowed noticeably in recent months. And a number of Wall Street economists are marking down the anemic recovery even more, suggesting that the 3 percent growth at the end of last year, which faltered to 2 percent growth in the first quarter, could be even less in the period ahead.