Tuesday, June 7th, marked the 10-year anniversary of the passage of the 2001 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cuts—formally known as the Economic Growth and Tax Relief Reconciliation Act of 2001 or EGTRRA (pronounced “egg-tray” by Washington insiders). Many groups issued shrill press releases to commemorate the event, blaming the lower rates for the deficit and other economic ills facing the country.
While many on the political left rail against the Bush-era tax rates and believe they should be allowed to expire, it is interesting to note that these “temporary” tax rates have been in place longer than the “permanent” Clinton-era tax rates they cut. Indeed, the lower Bush-era tax rates—with a top rate of 35 percent—have been fully in effect for nine years, since the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA or “jeg-tray”) was enacted to accelerate the phased-in rate cuts set forth in the 2001 legislation. By contrast, the Clinton-era rates—with a top rate of 39.6 percent—were in effect for just seven years, from 1994 to 2000.
Ironically, before the Bush-era rates expire (again) on December 31, 2012, they will have been in place for 10 years, which will tie the 1954 to 1963 period (with a top rate of 91 percent) for the second longest period of stability for any set of tax rates. The longest any top rate was in effect was the 17 years between 1965 and 1981, when the top rate was 70 percent.
Since it was enacted in 1913, the tax code has been anything but stable. The top rate alone has been changed at least 28 times over the past 98 years (click here for the rates from 1913 to 2011). Remarkably, even the 7 percent top rate enacted in the first income tax code was only in effect for two years.
|
Presidential Era |
Top Rate |
Years in Place |
|
Kennedy to Carter* |
70% |
17yrs, 1965 — 1981 |
|
Eisenhower–Kennedy |
91% |
10yrs, 1954 — 1963 |
|
Bush–Obama |
35% |
10yrs, 2003 — 2012 |
|
Clinton |
39.6% |
7yrs, 1994 — 2000 |
|
Reagan 1 |
50% |
5yrs, 1982 — 1986 |
|
Reagan–Bush |
28% |
3yrs, 1988 — 1990 |
|
Wilson (First Tax Code) |
7% |
2yrs, 1913 — 1915 |
|
*Excludes surtaxes of 1968 and 1969 |
Why were the Bush-era tax bills made temporary and not permanent law? Because during the legislative fight over tax cuts in 2001, Senate Republicans did not believe they could reach the 60-vote threshold of support that would have enabled them to make the tax cuts permanent. So they passed the legislation as a “reconciliation” bill which needs only 51 votes. The 2003 bill—which mostly accelerated the original tax cuts, but also put in place new tax cuts for dividends and capital gains—was also passed under reconciliation. (For more information, read our FAQ here).
So although the Bush-era tax rates have now been the law of the land for longer than the Clinton-era rates they replaced, Washington’s arcane budget rules still regard the Clinton-era rates as “permanent law” and require that the budget baseline be calculated as the amount of tax revenues the government could collect were those higher tax rates in effect.
To the Washington budget establishment, the projected tax revenues that could be raised from the Clinton-era tax rates are as good as collected. Thus, any difference between those higher estimates and the amount that can be collected under the Bush rates is money that must be “borrowed” to finance the government. This is kind of like the young couple who bought a home for $300,000 and now wants to sell it for $500,000, but think they will “lose” money if the home sells for $450,000.
So when does a temporary tax cut effectively become permanent law? Perhaps it is time to stop the pretense that the Bush-era tax rates are temporary and need to be “paid for.” One thing is for certain, American taxpayers are being ill-served by the arcane and Beltway-centric jargon of the current tax debate.
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