Tax cuts are always an easy and quick way to stimulate the economy by putting more money directly into taxpayers' hands. President Bush gave tax cuts to families in 2001, and to businesses in 2003. These were due to expire in 2011. He mailed out a one-time tax rebate to unsuccessfully ward off the financial crisis of 2008. Instead of expiring in 2011, the Bush tax cuts were extended in 2010 for two years. Debate over whether the cuts should be extended for those making $250,000 or more is an important factor in the 2012 Presidential campaign.
In 2001, President George Bush enacted a tax cut known as the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). It was enacted to stimulate the economy during the 2001 recession. It saved taxpayers, and increased the debt, by $1.35 trillion over a 10-year period. The Urban Institute said the tax cuts benefited families with children, and those with incomes over $200,000, the most. The 2001 Bush Tax Cut was designed to expire in 2011. Little did the originators know that this stimulus would end when the economy was still struggling to recover from the worst recession since the Great Depression.
In 2003, President Bush cuts taxes again with the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). This tax cut reduced tax rates on long-term capital gains and dividends to 15%. It also accelerated many of the provisions in EGTRRA, which were supposed to be phased in more gradually. Finally, it increased tax deductions for small businesses. The 2003 Bush Tax Cut was designed to expire in 2012.
The $168 billion Bush Tax Rebate was approved by Congress in early 2008. Everyone got tax relief on the first $6,000 of taxable income for individuals and the first $12,000 of income for couples. People received a check in the mail, which felt like free money, even though they were getting their own tax withholding back. In fact, each rebate dollar spent generated $1.19 in additional economic growth. The one-time rebate was a little more than 1% of GDP
, which should have been enough to boost economic growth. Unfortunately, the collapse of Lehman Brothers, Fannie Mae, Freddie Mac
and AIG later that summer destroyed confidence in the global banking system. This negated any positive effect of the tax rebates, and plunged the U.S. economy into five quarters of recession.
Frustration over President Obama's economic stimulus package, led to the Republican Tea Party movement, which opposed any tax increases. Obama had pledged to allow the Bush tax cuts expire for those making more than $200,000 a year. The Tea Party said this would hurt job creation, since it would affect the small business owners who create 60% of all new jobs. The 2010 mid-term elections resulted in a Republican majority in the House. This upset in power meant the Bus tax cuts would be approved by the lame-duck Congress before the year was out.
The Bush tax cuts weren't due to expire until the end of 2011. However, Congress was faced with an earlier deadline. The IRS had to issue 2011 tax withholding table by mid-December 2010. This was a mid-term election year, and no Congressman wanted to jeopardize re-election by voting against the extension. Congress and President Obama approved a two-year extension, even though the President fought against the extension for wealthier taxpayers. The $858 billion tax cut deal cut payroll taxes by 2%, extended a college tuition tax credit, and revived a 35% inheritance tax on the wealthy.
According to supply-side economics, tax cuts will increase consumer spending enough to make up for the revenue loss. That's because consumers and businesses will spend enough of the tax cuts to increase demand and create jobs. This creates so much economic growth that tax revenues ultimately rise. The same effect doesn't occur with increased government spending, according to the theory.
Supply-side economics was based on the Laffer Curve, which was developed in 1979 by economist Arthur Laffer. The curve describes how tax cuts affect government revenues
. The first is "arithmetic," which creates an immediate loss of tax revenue. The second is "economic," which is longer-term. Over time, consumers will spend their tax savings, creating more demand and more business growth. Eventually, this will replace the lost revenue. However, for the tax cuts to have this impact, taxes before the cuts must be in the "Prohibitive Range" on the curve. If taxes are already lower than that range, then they will only have the "arithmetic" effect.