Bush Tax Cuts: Rhetoric and Reality

Published August 1, 2006

Since George W. Bush became president in 2001, Congress has enacted a series of tax cuts on just about every type of federal tax, from excise taxes to income taxes to the estate tax.

Those cuts have not occurred without controversy. Critics charge the wealthy have disproportionately benefitted, the federal government is floating in red ink, and the cuts were just a hodgepodge of initiatives that made the tax code more complex.

Budget & Tax News contributing editor Sandra Fabry of Americans for Tax Reform recently spoke with Daniel Clifton, executive director of the American Shareholders Association (ASA), about the Bush tax cuts.

Fabry: Your research shows that over the past six years President George W. Bush’s tax cuts have returned $1 trillion to taxpayers, with more to come over the next several years. In your opinion, what were the most positive, significant aspects of the Bush tax cuts?

Clifton: You are absolutely correct on the dollar amount, $1 trillion in just six years, but I believe the most important aspect of the tax cuts is not the dollar amount but rather the structural changes Bush has achieved.

First, the president smashed the old model of governing on tax issues. Every 20 years a president would enter office and enact a major tax cut. In the remaining years Congress would pass and the president would sign tax increases. Bush changed this pattern dramatically by cutting taxes every year for six consecutive years.

Second, Bush changed how tax reform should be viewed. When Republicans took over the House of Representatives and the Senate in 1995, they came storming in calling for major tax reform. However, they could not agree on a plan. Infighting started, and nothing was accomplished. Bush smashed this model by focusing on removing the double tax placed on savings and investment, which is the key to any credible tax reform plan. This united the coalition for tax reform and, incrementally, has made it easier for the next president to do fundamental tax reform.

And third, each component of the Bush tax cut provided real-life tests of how tax reductions on capital boost economic growth. In the early 1990s think tanks would write hypothetically about how different changes in tax rates would affect economic growth, job creation, and the stock market. We don’t need hypothetical theories at this point. We actually lowered the capital gains tax rate, and in three years household net worth increased $13 trillion–33 percent. We lowered the tax on repatriated profits, and companies returned more than $200 billion to invest in America and not in other countries.

These are real-life examples of just tax cuts–imagine the growth impact that will result when we actually eliminate these harmful taxes.

Fabry: What were some of the downsides to the Bush tax cuts?

Clifton: The temporary nature of the tax cuts, plus the fact that the president cut and did not eliminate different types of taxes, has made the tax code more complex. The Tax Foundation estimates that in 2005 taxpayers spent six billion hours complying with the tax code, resulting in a $265 billion cost just to comply with the tax code. This number will only increase in future years.

Also, the 2001 tax cuts contained provisions that had no impact on savings and investment and were very costly in terms of the budget. As a result, the pro-growth provisions, such as lower income tax rates and estate tax repeal, had to be phased in over a 10-year period. The result was that the first tax cut really had no impact on economic growth.

The whole point of the 2003 tax cut was to go back and accelerate all the phased-in tax cuts and to add the capital gains and dividend provisions that were excluded in 2001. The difference between the 2001 and 2003 tax cuts, in terms of economic growth, is out of this world.

Fabry: We often hear the tax cuts increased the budget deficit. What does your research find?

Clifton: The federal government has cut taxes by $383 billion since 2003, and tax revenues are rising at their fastest rates in American history for the past two years. Last year was the largest one-year increase in tax revenue in American history, as the capital gains tax cut paid for itself 16 times over.

Our research shows 52 percent of the “costs” of the 2003, 2004, and 2005 tax cuts have been recouped through higher levels of economic growth. As a result, the deficit today is lower than it was in May 2003 when the tax cut passed. But while tax revenues have been soaring, so has spending, in the 8 to 9 percent range [annually].

While the deficit is substantially declining, it would be even lower if spending were not rising at two to three times the rate of working families’ incomes.

Fabry: Have the wealthy disproportionately benefited from these tax cuts?

Clifton: If you repeat something so much, regardless of how false, it becomes [accepted as a] fact. And there is probably no way to change people’s minds unless they see the real facts.

First, every taxpayer received a [federal] tax cut. And while everyone is paying less in [federal] taxes, the rich are now paying a higher percentage of the federal tax burden than before the tax cuts went into place.

The Tax Foundation estimates that roughly 44 million people [in the United States] pay no [federal] income taxes. A family of four making $40,000 received a 96 percent [federal] tax cut from the 2003 legislation. At the same time, tax revenues are surging in the form of non-wage income, which means capital gains, dividends, stock options, and small businesses that tended to have higher incomes. So the burden has actually shifted more to wealthy taxpayers–but that is not a story the mainstream press likes to tell.

Fabry: What tax cuts are next in the pipeline?

Clifton: An estate tax compromise is on the Senate floor, and the IRA [Individual Retirement Account] and 401(k) provisions are in the pension conference [between the House and Senate]. The importance of these tax cuts? They are the first of the Bush initiatives to be made permanent.

But without major changes to how tax cuts are “scored” by the government revenue estimators, the ability to get major tax cuts on savings and investment will be limited. Taking into consideration that these tax cuts increase economic growth–and hence tax revenues–is vital to ensuring that America’s tax burden remains competitive internationally.

Sandra Fabry ([email protected]) is state government affairs manager for Americans for Tax Reform.