Bush tax cuts: What are they & how do they affect the taxpayers and federal deficit

This is an important issue since McCain said he would continue the Bush tax cuts and Obama said he would repeal them (for the richest taxpayers).   I didn't really know anything about what the "Bush" tax cuts were, and there seemed to be a lack of reliable information on the web.   The following is what I found, and where I found it.

·         Middle-income persons pay lower federal income taxes under Bush tax cuts in 2008 than they did under Bill Clinton in 1999.   Per http://www.factcheck.org/askfactcheck/do_middle-income_persons_pay_lower_federal_income.html

o       The actual tax cuts between 1999 and 2008 (per the Tax Foundation) are as follows:  For single making 30K $401.25,  Single making 50K $656.25,  Single making 75K $1,406.25, Married making 60K $1,072.50,  Married making 75K $1,664.00,  Married making 125K $3,964.00     Per http://www.factcheck.org/askfactcheck/do_middle-income_persons_pay_lower_federal_income.html

·         The affect of the Bush tax cuts was written about by Stephen Moore in a Wall Street Journal article dated May 4, 2006.  Here is an excerpt: 

o       "So how can the media contort these statistics to conclude that the Bush tax cuts only benefited the affluent? The New York Times claims that the richest 0.1% got 5,000 times the tax benefit than those with less than $50,000 of income. That figure can only be true if one assumes that there were no economic benefits from the tax cuts whatsoever; and that lower taxes on income, capital gains and dividends resulted in no changes in the real economy -- not the value of stocks, not business spending, not employment, not capital flows into the U.S., not corporate dividend payments, not venture capital funding -- nothing. The underlying assumption of this static analysis is that tax cuts don't work and that incentives don't matter. Of course, in the real world, financial incentives through tax policy changes matter a great deal in altering economic behavior. And we now have the evidence to confirm that the latest round of tax cuts worked -- five million new jobs, a 25% increase in business spending, 4% real economic growth for three years and a $4 trillion gain in net wealth. So now the very class-warfare groups who, three years ago, swore that the tax cuts would tank the economy rather than revive it, pretend that this robust expansion would have happened without the investment tax cuts. Many Democrats on Capitol Hill recite this fairy tale over and over."    Per http://online.wsj.com/article/SB114670305012743294.html

·         In an article by Stephen Moore (a member of The Wall Street Journal's editorial board) in December 2006 (per http://www.american.com/archive/2007/november-december-magazine-contents/guess-who-really-pays-the-taxes/ ) he wrote: 

"What income group pays the most federal income taxes today?  The latest data show that a big portion of the federal income tax burden is shoul­dered by a small group of the very richest Americans. The wealthiest 1 percent of the population earn 19 per­cent of the income but pay 37 percent of the income tax. The top 10 percent pay 68 percent of the tab. Meanwhile, the bottom 50 percent—those below the median income level—now earn 13 percent of the income but pay just 3 percent of the taxes. These are proportions of the income tax alone and don’t include payroll taxes for Social Security and Medicare."

"But haven’t the [Bush] tax cuts put more of the burden on the backs of the middle class and the poor?   No. I examined the Treasury Department analysis of how much the rich would have paid without the Bush tax cuts and how much they actually did pay. The rich are now paying more than they would have paid, not less, after the Bush investment tax cuts. For example, the Treasury’s estimate was that the top 1 percent of earners would pay 31 percent of taxes if the Bush cuts did not go into effect; with the cuts, they actually paid 37 per­cent. Similarly, the share of the top 10 percent of earners was estimated at 63 percent without the cuts; they actually paid 68 percent."

"What has happened to tax rates in America over the last several decades?   They’ve fallen. In the early 1960s, the highest marginal income tax rate was a stunning 91 percent. That top rate fell to 70 percent after the Kennedy-Johnson tax cuts and remained there until 1981. Then Ronald Reagan slashed it to 50 percent and ultimately to 28 percent after the 1986 Tax Reform Act. Although the federal tax rate fell by more than half, total tax receipts in the 1980s doubled from $517 billion in 1981 to $1,030 billion in 1990. The top tax rate rose slightly under George H. W. Bush and then moved to 39.6 percent under Bill Clinton. But under George W. Bush it fell again to 35 percent. So what’s striking is that, even as tax rates have fallen by half over the past quarter-century, taxes paid by the wealthy have increased. Lower tax rates have made the tax system more progressive, not less so. In 1980, for example, the top 5 percent of income earners paid only 37 percent of all income taxes. Today, the top 1 percent pay that proportion, and the top 5 percent pay a whopping 57 percent." 

·         Back in 2004 the Bush administration was claiming that everyone got a tax cut, but failed to take into account those who got no tax cut because they were already paying no federal income tax yet were paying Social Security and Medicare payroll taxes. See a 2004 analysis of the white house claims at http://www.factcheck.org/here_we_go_again_bush_exaggerates_tax.html       Since then the tax rates have shifted even more in favor of the richest taxpayers, however, the degree of this shift is slight as can be seen below, and this chart does not take into account the affect of altered economic behavior which actually had the effect of increasing the share of the tax burden paid by people making over $200,000.   Per http://online.wsj.com/article/SB114670305012743294.html

·         Here is how the "Bush tax cuts" (a.k.a. EGTRRA of 2001, JCWAA of 2002 and JGTRRA of 2003)  changed the tax rates between 2001 (before the cuts) and 2007.  JGTRRA mainly cut tax rates on capital gains and dividends.  These numbers are taken from a report by the Congressional Budget Office at http://www.cbo.gov/ftpdocs/57xx/doc5746/08-13-EffectiveFedTaxRates.pdf  listed from the poorest to richest tax payers:

o       For the lowest quintile:  Before 5.4%, after 5.7%   (+0.3 )

o       For the second quintile:  Before 11.6%, after 12.3%   (+0.7 )

o       For the middle quintile:  Before 15.2%, after 15.9%   (+0.7 )

o       For the fourth quintile:  Before 19.3%, after 20.0%   (+0.7 )

o       For the highest quintile:  Before 26.8%, after 26.5%   (-0.3 <<Note decrease)

o       For the top 10%:  Before 28.6%, after 28.0%   (-0.6 <<Note decrease)

o       For the top 5%:  Before 30.1%, after 29.2%   (-0.9 <<Note decrease)

o       For the top 1%:  Before 33.0%, after 30.9%   (-2.1 <<Note decrease)

Measured as a "share of total federal tax liabilities":

o       For the lowest quintile:  Before 1.1%, after 1.1%   (no change)

o       For the second quintile:  Before 5.0%, after 5.2%   (+0.2)

o       For the middle quintile:  Before 10.0%, after 10.4%   (+0.4)

o       For the fourth quintile:  Before 18.5%, after 19.1%   (+0.6)

o       For the highest quintile:  Before 65.3%, after 64.0%   (-1.3 <<Note decrease)

o       For the top 10%:  Before 50.0%, after 48.5%   (-1.5 <<Note decrease)

o       For the top 5%:  Before 38.5%, after 37.0%   (-1.5 <<Note decrease)

o       For the top 1%:  Before 22.7%, after 21.1%   (-1.6 <<Note decrease)

·         Note that contrary to what some say (e.g. http://www.heritage.org/Research/Taxes/bg2001.cfm), in 2007 there is a shift of the tax burden (albeit slight) from the wealthiest to the poorer tax payers, compared to 2001.   It amounts to a slight flattening of the "progressiveness" of the tax rates (i.e. the rate at which taxes increase with wealth is not as steep).   Per http://www.cbo.gov/ftpdocs/57xx/doc5746/08-13-EffectiveFedTaxRates.pdf      Below is the same data in graphical format.

·         Note:  For info about the Obama/McCain tax plans go to the web site for the Tax Policy Center (a non-partisan group) at www.taxpolicycenter.org

·         Future:  If these tax cuts are allowed to finish phasing in, the rates by 2014 (compared to 2001) will be:

o       For the lowest quintile:  Before 5.4%, after 8.3%   (+2.9 )

o       For the second quintile:  Before 11.6%, after 14.7%   (+3.1 )

o       For the middle quintile:  Before 15.2%, after 18.2%   (+3.0 )

o       For the fourth quintile:  Before 19.3%, after 22.4%   (+3.1 )

o       For the highest quintile:  Before 26.8%, after 28.8%   (+2.0)

o       For the top 10%:  Before 28.6%, after 30.3%   (+1.7 )

o       For the top 5%:  Before 30.1%, after 31.6%   (+1.5)

o       For the top 1%:  Before 33.0%, after 33.6%   (+0.6)

·         Note that rates eventually go up for everybody, including the wealthy, but the Congressional Budget Office explains that "The increases in the effective tax rate between 2005 and 2010 and between 2011 and 2014 occur primarily because rising real incomes [i.e. after adjusting for inflation] move taxpayers into higher tax brackets and the alternative minimum tax affects more taxpayers over time."    Also note that the "progressiveness" of the tax in 2014 is still about the same as it is in 2007.  These numbers are based on data from http://www.cbo.gov/ftpdocs/57xx/doc5746/08-13-EffectiveFedTaxRates.pdf

·         How this change in tax rates affects total government revenues:  

o       The following analysis shows that the biggest factor in the federal deficit is NOT the cost of the wars, and is NOT the tax cuts, but is by far over-spending by congress.     (Per my opinion)

o       The total deficit as percentage of GDP from 2001 through 2007 was (per  http://www.cbo.gov/budget/data/historical.pdf) :   +1.3, -1.5, -3.5, -3.6, -2.6, -1.9, -1.2.   Note that 2001 showed a +1.3 surplus.  So the deficit has been shrinking (as a percentage of GDP) since 2004.   Spending (as a percentage of GDP) during that period was:   18.5, 19.4, 20.0, 19.9, 20.2, 20.4, 20.0.   So spending has been increasing.   You might conclude that if we had kept spending in check (i.e. at 2001 rates) then the deficits would have been +1.3, -0.6, -2.0, -2.2, -0.9, 0.0, +0.3, i.e. we could currently have a budget surplus by now if we had limited spending to 2001 levels as a percentage of GDP.   Unfortunately, it isn't quite that easy since the spending spree by the government is partly why the GDP got such a boost during this period, so if the spending hadn't taken place, GDP and therefore revenues would not have been as high during that period.

o       The above numbers are the deficit as a percentage of GDP.   The actual revenue numbers during the 2001-2007 period have been growing fairly rapidly, after a slight dip in 2002 and 2003.   Here's the revenue (billions) from 2001-2007:   1991.4, 1853.4, 1782.5, 1880.3, 2153.9, 2407.3, 2568.2     

o       Also, spending per year during this same period increased by 865.7 billion.   In other words, we were spending 865.7 billion more per year in 2007 than we were in 2001 (a 46.5% increase). 

o       The total cost of all war-related defense spending in 2007 (per http://www.cbo.gov/ftpdocs/89xx/doc8971/02-11-WarCosts_Letter.pdf) was 165 billion.     So 865.7-165 = 700.7 billion of the increased spending in 2007 is not war-related.

o       My conclusion is that the biggest factor in the federal deficit is NOT the cost of the wars, and is NOT the tax cuts, but is by far over-spending by congress.     (Per my opinion)

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Last modified: 11/05/08