What Is EGTRRA?:
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was part of the George Bush tax cuts. EGTRRA gave income tax relief to families, who were expected to spend the extra money. This increase in demand would boost the economy and lift it out of the 2001 recession. It saved taxpayers $1.35 trillion over that 10-year period. The Urban Institute said the tax cuts benefited families with children, and those with incomes over $200,000, the most.
Specifically, EGTRRA:
- Reduced income tax rates for most taxpayers by a few points. Since it was retroactive to the beginning of 2001, refund checks were mailed out to taxpayers who had already paid their taxes.
- Created a new 10% tax bracket for incomes below $34,550.
- Doubled the child tax credit from $500 to $1,000.
- Eliminated the “marriage penalty” by making exemptions for married couples equivalent to what they would have had if they were single.
- Provided greater tax deductions for education expenses and savings.
- Increased the amount of tax-deductible contributions taxpayers could make to their IRA accounts.
- Repealed estate and gift taxes.
How Did EGTRRA Affect the Economy?:
EGTRRA initially helped the economy by stimulating spending during the recession of
2001. It also had incentives for taxpayers to save more.
However, EGTRRA hurt the economy by dramatically decreasing government revenues. This increased each year’s annual deficit, and thereby the U.S. debt. This debt puts downward pressure on the value of the dollar. To help the economy the most, the Bush tax cuts should have been designed to expire in 2003. Most recessions only last 18 months, so the stimulus would have done its job by then. Legislators should have rescinded the tax cuts when the economy was booming. Higher taxes would have slowed spending, helping to prevent the housing boom that ultimately led to the Great Recession.
Instead, EGTRRA and the other Bush tax cut, JGTRRA, were designed to expire in 2011. As it so happened, the expiration would have occurred after the financial crisis of 2008, but before the economy had gotten back on its feet again. It was difficult to rescind tax cuts when economic growth was still tenuous. At the same time, Congress was facing a record $13 trillion debt. It was caught between the rock of recession and the hard place of fiscal responsibility.
In the fall midterm elections of 2010, Republicans gained the majority in the House of Representatives. They advocated extension of EGTRRA for two years. They did not want to see what they considered a tax increase. Democrats agreed -- except they didn't' want to extend the tax breaks to those earning $200,000 ($250,000 for families) or more. They thought the recession didn't affect the wealthy as much, and were concerned about adding to the deficit. The Republican majority won. The full extension of EGTRRA was added to the Obama tax cuts of 2010. In addition to extending the Bush tax cuts, Obama extended unemployment benefits and cut payroll taxes. (Article updated September 23, 2011)
