The Bush Tax Plan: How Big Was the Cut?

Published August 1, 2004

There is a good deal of disagreement over just how big President George W. Bush’s tax cuts really were, and hence whether they were a wise policy choice.

According to the Treasury Department, there have been 19 significant federal tax cuts since the end of World War II. Three of them–the Economic Growth and Tax Reform Reconciliation Act of 2001 (EGTRRA), the Job Creation and Workers Assistance Act of 2002 (JCWA), and the Jobs and Growth Tax Relief and Reconciliation Act of 2003 (JGTRRA)–were passed under this Bush administration.

The accompanying tables compare the 2003 tax cut with Bush’s 2001 and 2002 tax cuts and with the two largest tax cuts in the post-WW II era–the Kennedy tax cut of 1964 and the Reagan tax cut in 1981.

Bush Tax Cuts Not Unusually Big

Looking at the Bush tax cuts in light of the Kennedy and Reagan cuts suggests the Bush cuts were by no means extraordinary in magnitude.

Tax Cuts and National Income: Contrasting the size of the various tax cuts with national income shows that the Kennedy tax cut, representing 1.9 percent of income, was the single largest first-year tax cut of the post-WW II era. The Reagan tax cuts represented 1.4 percent of income, while none of the Bush tax cuts even reached 1 percent of income. The Kennedy tax cuts would have been surpassed in size only by combining all three Bush tax cuts into a single package.

Tax Cuts and Budget Resources: Comparing the size of these tax cuts with the federal budget shows that the Kennedy tax cuts represented 8.8 percent of the budget. In 1981, Reagan’s tax cuts represented 5.3 percent of the budget. Each of Bush’s tax cuts has been smaller than Reagan’s–EGTRRA (3.8 percent), JCWA (2.5 percent), and the 2003 Tax Cut (1.8 percent). Taking all three Bush tax cuts together (8.1 percent), they are larger than Reagan’s but smaller than Kennedy’s.

Tax Cuts and Defense Costs: When the Kennedy tax cuts were enacted, the conflict in Vietnam was escalating, and defense spending constituted a whopping 42.1 percent of the federal budget. When Reagan pushed through his tax cuts during the height of the Cold War, the Pentagon was consuming 22 percent of the federal budget. Today, defense spending consumes just 17.1 percent of the budget–25 percentage points below Kennedy’s level of defense spending.

Tax Cuts and Deficits: Kennedy passed his tax cuts while running a deficit equaling 1 percent of national income. In 1981, Reagan cut taxes while running a deficit of 2.8 percent of national income. Bush passed the largest of his three tax cuts, EGTRAA, in 2001 with a budget surplus of 1.5 percent of income.

Problems with Comparisons

Comparing tax legislation over time is tricky. In the 1960s, Congress calculated only how much a tax proposal would save taxpayers in the next year. In the late 1970s, five-year estimates became the norm, and more recently 10-year estimates have been required.

Obviously, no one should compare the dollar amount of a 10-year estimate to that of a five-year or one-year estimate. Whenever you hear or read that the Bush tax cut in 2001 was “the biggest tax cut ever,” that’s the mistake being made: It is like saying a 16 ounce steak costs more now than an 8 ounce steak cost 20 years ago.

With two precautions, however, tax legislation can be compared. The first step is to adjust for inflation, and the second is to compare the effects over the same number of years. Although the comparison between the various tax cuts outlined here is interesting and gives a general idea of how large a tax cut past presidents and congresses were willing to consider, it is an exercise fraught with technical difficulties.

Scott Moody is an economist for the Tax Foundation. His email address is [email protected].