February 20, 2013 | Issue Brief on Taxes
The first round of what have come to be known as the Bush tax cuts went into effect 12 years ago. Now that a more than decade-long debate has mercifully ended, like a story on where the stars of popular 1980s sitcoms are today, it is instructive to look back and see what happened to the Bush tax cuts.
Back in 2001, President George W. Bush had just entered office and a recession that had its roots during President’s Clinton second term began. In order to help right the flagging economy and set it on a permanently stronger foundation for growth going forward, President Bush accomplished a reduction of income tax rates that phased in slowly over time and other tax cuts for the middle class, such as a doubling of the child tax credit, through Congress.
By 2003, it was clear that the economic benefits from lower rates were not materializing fast enough because the rate reductions were phasing in too slowly. So President Bush and Congress agreed to speed up those rate reductions and reduce the bias against investment by lowering rates on capital gains and dividends and phasing out the estate tax (better known as the “death tax”).
It was at that point that the beneficial effects from these policies began to take hold and the economy began to exhibit stronger growth.
The Bush tax cuts were always meant to be permanent improvements to the tax code. Instead, they came with a 10-year expiration date, because Congress passed them through an arcane budget process known as “reconciliation” that later became famous for allowing Obamacare to become law.
The original expiration date was the end of 2010. Then, President Obama and Congress cut a deal to extend almost all of the Bush tax cuts for two more years. (The phase-out of the death tax was left out of the deal.) It was that extension that largely led to the morass known as the “fiscal cliff” that the nation just suffered through.
The fiscal cliff deal raised taxes by allowing some of the Bush tax cuts to expire. A silver lining of the deal is that it made other Bush-era policies permanent. Detailed below are all the policies set by the Bush tax cuts and where those policies stand now:
The fiscal cliff deal made each of these policies permanent.
There is never a “last tax bill.” Congress will keep changing the tax code every year, so there is hope that it will soon rectify the mistakes it made in the fiscal cliff deal. Until then, taxpayers can take solace in the fact that they have certainty about taxes for the time being—and that the drive for fundamental tax reform that could fix the fiscal cliff errors, and other major tax flaws, remains strong.
Despite the tax increase caused by the fiscal cliff deal, there are still some in Washington who want to raise taxes further. In fact, some—including President Obama—have gone so far as to distort the meaning of tax reform to mean tax increases. America has a deficit and debt problem because Washington is spending too much, not because it is taxing too little. That was true before the fiscal cliff tax increase and remains true today. Congress and the President should focus on cutting spending to fix deficits and debt, not taking even more of taxpayers’ hard-earned income.
Curtis S. Dubay is a Senior Analyst in Tax Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. Christian McNally, member of the Young Leaders Program at Heritage, contributed to this report.
See Curtis S. Dubay, “Setting the Tax Record Straight: Clinton Hikes Slowed Growth, Bush Cuts Promoted Recovery,” Heritage Foundation Backgrounder No. 2601, September 11, 2011, http://www.heritage.org/research/reports/2011/09/setting-the-tax-record-straight-clinton-hikes-slowed-growth-bush-cuts-promoted-recovery.
For a full list of the Bush tax cuts, see Curtis S. Dubay, “Taxmageddon: Massive Tax Increase Coming in 2013,” Heritage Foundation Issue Brief No. 3558, April 4, 2012, http://www.heritage.org/research/reports/2012/04/taxmageddon-massive-tax-increase-coming-in-2013.
See Curtis S. Dubay, “Fiscal Cliff Deal: Tax Increase Spoils Permanent Victory for Most Taxpayers,” Heritage Foundation Issue Brief No. 3821, January 9, 2013, http://www.heritage.org/research/reports/2013/01/fiscal-cliff-deal-how-it-will-affect-taxpayers-and-the-economy.
The fiscal cliff deal set the top tax rate higher but created a new tax bracket with a 35 percent rate. For further explanation, see ibid.
White House Office of Management and Budget, “Deficit Reduction in the American Taxpayer Relief Act of 2012 (H.R. 8),” http://www.whitehouse.gov/sites/default/files/omb/communications/misc/cboscore_hr8_20130101.pdf (accessed February 15, 2013).
News release, “Remarks by the President,” The White House, February 5, 2013, http://www.whitehouse.gov/the-press-office/2013/02/05/remarks-president (accessed February 20, 2013).