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Expiration of Bush-Era Tax Cuts
What are the tax cuts?In 2001 and again in 2003, the Bush administration instituted a series of changes in the tax code that had the effect of lowering the taxes at every level. The 2001 act lowered the 28-percent bracket to 25 percent by 2006 and the 39.6 percent bracket (the top bracket) to 35 percent. The 2003 act decreased tax rates on income derived from interest, dividends and capital gains and provided a $1,000-per child tax credit, among other measures. In order to ensure the passage of these acts, the Bush administration agreed to allow the tax cuts to expire in 2010.
What happened in 2010? Faced with difficult economic conditions, the Obama administration could not allow the tax cuts to expire for all Americans. They suggested extending the tax cuts for everyone except for those individuals with incomes above $200,000 ($250,000 for couples), who represent 2-to-3 percent of Americans. Republicans in Congress blocked these proposed changes, so a compromise was created that allowed all Bush-era tax cuts to remain in place-but only for two years.
Why are we talking about it again in 2011? In September 2011, President Barack Obama suggested allowing the tax cuts to expire in 2013 as part of his $3 billion deficit reduction plan. In addition, he proposed limiting the deductions, which high-income taxpayers-households over $250,000-can use to reduce their tax liability. If Obama gets his way, in 2013 high-income households would see the top two income tax rates increase to 36 percent (from 33 percent) and 39.6 percent (from 35 percent). In addition, investment tax rates for these groups would rise to 20 percent from 15 percent.
Where the tax cuts a good idea? It depends on who you ask. When the acts were passed, Bush touted the idea that allowing more Americans to have more spending money would help stimulate the economy. Republicans maintain that continuing tax cuts for the $200,000 and up crowd allows the wealthiest Americans to create more jobs through spending and by hiring employees in their businesses; however, that plan assumes that the wealthiest Americans will invest the money in activities that provide jobs.
Opponents of the tax cuts point out that such cuts have contributed to the federal deficit and that they give a disproportionately large break to the wealthiest taxpayers. The Congressional Budget Office (CBO) estimates that extending the tax cuts for all taxpayers for the 2011-20 time period would add $3.3 trillion to the national debt.
What was the impact on the economy?This is also up for interpretation. Conservative economists claim that the tax cuts have been beneficial for the economy and advocate a 10-year extension of the cuts, which they predict would generate a GDP increase of$75 billion annually and a substantial growth in employment. Other studies observe that tax cuts to the wealthiest Americans have not done much to stimulate economic growth. When adjusted for inflation, median household income was lower in 2007 than in 2000; during the same time, the number of jobs grew at .9percent average annual rate, as compared with a 2.5percent average for comparable periods of economic expansion.
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