Research & Commentary: Extending the Bush Tax Cuts

Published July 7, 2010

Without Congressional action the Bush tax cuts will sunset on January 1, 2011 and raise U.S. residents’ tax bills by a whopping $3.1 trillion over the next 10 years. That would constitute at least the third time President Barack Obama has broken his pledge to not raise taxes on households making less than $250,000 per year. It is probable many of the tax cuts for lower- and middle-income taxpayers will be renewed, but others are in danger of expiring.

These tax hikes on income, dividends, and capital gains and a revival of the death tax would all damage an already-frail U.S. economy by dramatically discouraging capital investment. Detractors of extending the tax cuts in their entirety argue doing so would add to an already-soaring national deficit and be a boon to the “rich.” Those claims are false.

First, without serious spending reforms the nation’s deficits will remain inevitable and incurable regardless of how many taxes are raised or how much. The best way to rein in the deficit is to control spending and create an economic environment that fosters growth and thus provides more revenues.

Claims that these tax cuts are a boon to the “rich” are likewise disingenuous. Brian Riedl of The Heritage Foundation notes, “CBO data shows that just 25 percent of the tax cuts went to those making more than $250,000.”

Here are some of the main tax hikes that will take effect unless Congress acts to stop them:

Federal personal income tax rate changes:
The 10% income tax bracket would rise to 15%.
The 25% income tax rate would rise to 28%.
The 28% income tax rate would rise to 31%.
The 33% income tax rate would rise to 36%.
The highest federal personal income tax rate would increase from 35% to 39.6%.

Investment tax changes:
The highest federal dividend tax rate would increase from 15% to 39.6%.
The capital gains tax rate would increase from 15% to 20%.

Other notable tax changes:
The death tax rate would increase from zero to 55%.
The child tax credit would fall from $1,000 to $500

Source: Tax Foundation

The following articles offer additional information on the effects of these scheduled tax hikes.


Extend the Bush Tax Cuts—For Now
This opinion piece by Martin Feldstein, George F. Baker Professor of Economics at Harvard University, explains why this is a bad time to raise taxes. Given the current state of the economy, we should not consider letting the Bush tax cuts expire for at least two years, he argues. He concludes, “The fragility of the economic recovery means that it would be dangerous to allow any taxes to rise in 2011.”

Measuring the Optimal Tax Burden
John W. Skorburg, a lecturer in economics and finance at the University of Illinois at Chicago and associate editor of Budget & Tax News for The Heartland Institute, looks at what will happen if President Barack Obama raises taxes during his term. He finds, if “President Obama and Congress raise future tax burdens, trend growth in real GDP will fall further in the U.S. economy—to no more than 2.5% annually.”

The Tax Cuts Didn’t Cause the Budget Deficit
Brian M. Riedl of The Heritage Foundation explains the Bush tax cuts didn’t cause the budget deficit — it was the Bush “spending spree [that] played a much a larger role in the budget deficits.”

Fate of Bush Tax Cuts Uncertain As Expiration Approaches
The Tax Foundation outlines the various scenarios that could play out in regard to the expiration of the Bush tax cuts. It includes a complete list of all the changes in tax provisions and rates that will occur if Congressional action is not taken.

Tax Hikes and the 2011 Economic Collapse
Economist Arthur Laffer warns the nation will suffer a double-dip recession if the Bush tax cuts are allowed to expire. “The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain’t seen nothing yet,” he writes.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For additional information on this and other topics, visit the Budget & Tax News Web site at and The Heartland Institute’s Web site at

If you have any questions about this issue or the Heartland Web site, please contact Legislative Specialist John Nothdurft at 312/377-4000 or [email protected].