Three Good Reasons to Let the High-End Bush Tax Cuts Disappear This Year
President Bush and a Republican-controlled Congress passed a series of massive tax cuts from 2001 to 2006. Their cuts lowered everyone’s taxes, but they were skewed heavily to the wealthy. More than half of the total benefit from the Bush tax cuts this year alone will accrue solely to the richest 5 percent of Americans while the middle 20 percent of Americans will reap only 7 percent of the benefit.
All of these tax cuts were passed with a “sunset” provision that will cause them to expire at the end of 2010. Virtually everyone in Congress agrees with the Obama administration that we should make permanent all of the reduced taxes for those who make less than $250,000—that’s 98 percent of Americans. The disagreement is limited to those cuts that affect the richest 2 percent of Americans—with conservatives demanding that the wealthiest Americans continue to benefit from the Bush administration’s largess.
There are lots of good reasons to let the Bush tax cuts for the rich expire. Here are just three.
Billions of dollars in tax breaks for the wealthy is just about the least efficient use of that money
The country was facing the distinct risk of the Great Recession turning into a second Great Depression two years ago, which was fortunately averted through a massive and unprecedented government effort. A recent report from Mark Zandi and Alan Blinder confirms the importance, indeed the centrality, of the government’s efforts to stave off such a calamity. But we still have a long way to go to get the economy back onto strong footing and clean up the mess that was left in the wake of the economic hurricane.
The Congressional Budget Office evaluated a variety policies earlier this year based on their ability to boost overall economic growth and employment. The number one thing Congress can do, according to the report, is to increase aid to the unemployed. Other efficient ways to give the economy a jolt include additional investments in infrastructure and more aid to states. The least efficient? Extending the tax cuts.
Congress has been trying over the past several months to implement many of the better policies, but conservatives have been standing firmly in the way. Their concern, they say, is the deficit. They claim these policies are all well and good, but that they should be paid for. Sen. Mike Johanns (R-NE) recently wrote, “I know people are out of work, and I don’t know a single Senator in Washington who didn’t want to see these benefits extended. But unless we get serious about reining in our spending, our short-term unemployment problem will be just a fraction of a long-term financial nightmare.” Sen. Johanns voted against extending those jobless benefits, but supports extending all of the Bush tax cuts.
That long-term financial nightmare the senator is talking about is, in large part, a product of the Bush tax cuts themselves. Maintaining the Bush tax cuts for the wealthiest Americans will only add to that problem. We estimate, using Congressional Budget Office and Joint Committee on Tax projections, that maintaining the Bush tax cuts for the wealthiest 2 percent of Americans will directly reduce revenues by about $690 billion over the next 10 years.* But the true cost of those tax cuts is actually a bit bigger than that.
The cost of those tax cuts is going to go straight onto our national credit card unless we raise taxes from everyone else to pay for the $690 billion in tax breaks for the rich or we find $690 billion in spending cuts. And that means increased interest payments on the debt. When we add in the costs of additional debt service, the true price of maintaining the tax cuts for the wealthy jumps by almost $140 billion.** In total, keeping those cuts for the rich will cost almost $830 billion over the next 10 years.
To put that figure in perspective, $830 billion is enough to pay for all veterans’ hospitals, doctors, and the rest of the Veteran’s Affairs health system, plus the United States Coast Guard, plus the Food and Drug Administration, plus the operation and maintenance of every single national park for the entire 10-year period—with more than $100 billion left over.
Extending the Bush tax cuts for the wealthy will cost about $80 billion over just the next two years, and frankly, that $80 billion could be put to much better use than simply giving it to the richest 2 percent of Americans. We could extend additional tax relief to middle-income Americans. We could make sure that teachers, firefighters, and police officers aren’t laid off. We could prevent unemployment benefits from lapsing again. We could rebuild some crumbling roads and bridges. We could invest in more science and technology research. Even just paying down the debt would be a better use of $80 billion than giving it to people who don’t need it. Simply put, tax cuts for the rich should be at the bottom of our priority list, not at the top.
The Bush tax cuts didn’t deliver what they promised
“Tax relief will create new jobs, tax relief will generate new wealth, and tax relief will open new opportunities.” So said President George W. Bush on April 16, 2001 as he was pushing for the passage of the first of his many tax cuts. President Bush was pushing the same line on his second package two years later: “These tax reductions will bring real and immediate benefits to middle-income Americans…By speeding up the income tax cuts, we will speed up economic recovery and the pace of job creation.”
They didn’t deliver. The economy boasted 132 million jobs in June of 2001, the month that the first of the Bush tax cuts was signed into law. Three years later, in June of 2004, there were just 131.4 million jobs. The economy did not add a single new job during three years under the Bush tax cuts. The next three years were better than the first three as the private sector struggled back to its feet following the first Bush recession. By June of 2007, before the start of the Great Recession, total jobs had grown to 137.7 million. Overall, the six years following the Bush tax cuts saw a 4.8 percent increase in jobs.
That’s not nothing, but it’s pretty anemic compared to job growth under President Bill Clinton. President Clinton, after raising taxes in 1993, oversaw an economy that went from 111 million jobs in August of that year (the month Clinton’s budget plan passed, including the increase in taxes) to 129 million jobs six years later—an increase of 16.2 percent, and more than three times better than under the Bush tax cuts.
And the Bush tax cuts didn’t just fail to stack up on jobs. Overall economic growth was much slower under the Bush administration’s tax policies than under the Clinton administration’s tax policies. Real gross domestic product grew by 26 percent in the six years after Clinton’s tax increases. But real GDP grew by just 16 percent in the six years after the Bush tax cuts began. In fact, that six-year growth rate was low even by general historical standards. The average real GDP growth in any given six year period (from any quarter to the same quarter six years later) since World War II was 22 percent.
And don’t forget that President Bush promised his tax cuts would deliver, “real and immediate benefits to middle-income Americans.” The cuts were a spectacular failure on this score, too. Real income for the median American household went from $51,356 in 2001 to $52,163 six years later—an increase of just 1.6 percent. Under President Clinton’s tax rates, real median household income went from $45,839 in 1993 to $52,587 in 1999—an increase of 14.7 percent.
This is just a cursory glance at the evidence, but more comprehensive approaches have come to the same conclusion: on jobs, on growth, on middle-class income, on investment, and on the Bush tax cuts that simply did not work.
But there is yet another area where the Bush tax cuts fail even more spectacularly. President Bush—having inherited a record surplus from President Clinton—promised in 2001 that his tax cuts would not harm the overall federal budget picture. Bush argued in selling his huge tax cuts that, “I know a lot of folks around America are worried about national debt, as am I. We [will] pay down $2 trillion of debt over the next 10 years.” Not only that, said Bush, but, “We’ve got a trillion dollars of contingency set aside over the next 10 years. And there’s still money left over. There’s still money left over.”
Needless to say, that’s not how things turned out. Total publicly held debt stood at $3.3 trillion at the beginning of fiscal year 2002, four months after President Bush signed the first package of tax cuts into law. Six years later publicly held debt passed $5 trillion. Not only did the Bush tax cuts not produce a $2 trillion debt reduction; they had precisely the opposite effect. In fact, the Bush tax cuts have directly added $2.5 trillion to the national debt in the full 10 years that they have been law.
It is odd, given the fantastically poor record of the Bush tax cuts on all of these measures, that conservatives are making exactly the same case for why they should be extended. Sen. Orrin Hatch (R-UT), for example, came out strongly against allowing the cuts for the wealthy to expire, saying, “If we want to spur economic growth and reduce the deficit, then let’s stop these massive job-killing tax hikes.” Why does he think that if the tax cuts didn’t work the first time, that this time will be any different?
Albert Einstein once quipped that the definition of insanity was doing the same thing over and over again and expecting different results. We’d be downright mad by that definition to extend the Bush tax cuts for the richest 2 percent of Americans.
The tax cuts for nearly all Americans and American small businesses would stay in place
Letting the Bush tax cuts expire on those making more than $250,000 will impact only about 2 percent of all American taxpayers, according to the Tax Policy Center. The rest, the other 98 percent, would remain unaffected—their tax rates will not change.
Of course, conservatives often argue that we will harm small businesses if we let the tax rates for these richest 2 percent go back to what they were under President Clinton. The data belie that claim. A recent report from the Joint Committee on Taxation points out that less than 3 percent of all taxpayers with any positive business income at all—big or small—would be affected by the increase in rates. In addition, the JCT reminds us that even the few businesses that are potentially subject to these tax hikes are not actually all that small: “These figures for net positive business income do not imply that all of the income is from entities that might be considered ‘small.’ For example, in 2005, 12,862 S Corporations and 6,658 partnerships had receipts of more than $50 million.” In other words, not only will just 3 percent of taxpayers with any business income be affected, but many of these taxpayers aren’t even small business owners at all. This conclusion is entirely consistent with other, similar reports.
The reality is that the vast majority of small business owners don’t make anywhere near a net $250,000 a year, so they won’t be affected by the expiration at all. The argument that letting the top marginal income rates go back to where they were in 1990’s would hurt small businesses is just a smokescreen. This is a tried-and-true method used by conservatives to confuse and obfuscate, and pretend that tax cuts for the very wealthy help anyone else besides just the very wealthy.
Because the entirety of the Bush tax cuts are scheduled to expire—a provision President Bush added at the time of enactment to hide the true, long-term costs of his cuts—everyone’s taxes will go up if Congress fails to act before the end of the year. President Obama and progressives in Congress are trying to make sure that doesn’t happen. Yet conservatives are blocking any progress in the service of protecting hundreds of billions of dollars for the rich. They are effectively holding everyone else hostage to the concerns of the wealthiest 2 percent of Americans. And, really, it’s not even those with incomes just a hair over the $250,000 whom they are protecting—the taxpayers at those levels will see very modest increases—it is the very wealthy who are being protected. Making the situation all the more despicable is the fact that the case against tax cuts for the rich is so incredibly strong.
Lower taxes for the rich don’t help the economy, they cost too much, the money could be put to much better use, and nearly everyone in the country would be completely unaffected if we simply let the rates go back to where they were under President Clinton. If conservatives really want tax relief, let them join with progressives to pass permanent tax cuts for 98 percent of Americans. If they want to continue protecting tax breaks for the rich in spite of all the evidence against them, they are free to do so, but they shouldn’t hold everyone else’s tax returns hostage in the meantime.
* In its January report, “The Budget and Economic Outlook: Fiscal Years 2010 to 2020,” the CBO projects that a full extension of the Bush tax cuts, plus a permanent fix to the Alternative minimum tax, will cost $3.7 trillion over 10 years, not including debt service costs. The Joint Committee on Tax estimated in a March 2010 report, “Present Law And The President’s Fiscal Year 2011 Budget Proposals Related To Selected Individual Income Tax Provisions Scheduled To Expire Under The Sunset Provisions Of The Economic Growth And Tax Relief Reconciliation Act Of 2001,” that the cost of extending just those cuts that affect people making less than $250,000 and permanently fixing the alternative minimum tax will cost $3 trillion. The difference—a bit less than $700 billion—is the cost of extending just those cuts for the wealthy.
**To calculate the additional debt service cost, we used the interest rates implied in the Congressional Budget Office’s most recent baseline budget projection, found in their March report entitled, “An Analysis of the President’s Budgetary Proposals for Fiscal Year 2011.”
Michael Linden is the Associate Director for Tax and Budget Policy and Michael Ettlinger is the Vice President for Economic Policy at American Progress.
Managing Director, Economic Policy
Vice President, Economic Policy