Looking Back at the Bush Tax Cuts, Fifteen Years Later

June 7, 2016

Fifteen years ago, today, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 into law – perhaps the single most consequential piece of tax legislation enacted in the last quarter-century. A decade and a half later, it is worthwhile to review the legacy of this bill, which is often referred to as the first of two “Bush tax cuts."

The Bush tax cuts stemmed from a campaign promise

In the late 1990s, an unusual circumstance presented itself to federal lawmakers: for several years in a row, the federal government ran a budget surplus. The Brookings Institution called the surplus of the late 1990s “one of the supreme budgetary accomplishments in American history,” but policymakers were already debating whether to let the surplus continue, whether to use it to fund new spending programs, or whether to use it to fund tax cuts.

The Republican nominee for President, George W. Bush, took a clear stance on the issue: the surplus was to be returned to American households in the form of tax relief. In his acceptance speech for the Republican nomination, he said:

“The last time taxes were this high as a percentage of our economy, there was a good reason … We were fighting World War II. Today, our high taxes fund a surplus. Some say that growing federal surplus means Washington has more money to spend. But they've got it backwards. The surplus is not the government's money. The surplus is the people's money.”

Legislative histories of the 2001 tax bill argue that the cuts stemmed directly from Bush’s promises on the campaign trail. Alex Brill writes, “From a political perspective, the Bush tax cut proposals began on the campaign trail in 2000.” Mona Lewandowski notes that many of the components of the 2001 tax bill were promoted during the Bush campaign.

It is worth keeping in mind that, like George W. Bush, presidential candidates often follow through on the tax proposals they make on the campaign trail. This is why the Tax Foundation has been keeping close track of the tax proposals of major presidential candidates; there’s a good chance that some components of these proposals will find their way into law.

The bill set the terms for the tax debate between 2001 and 2012

The 2001 tax bill consisted of several large tax cuts for individuals and households. Overall, the bill significantly reduced the total level of federal revenue collections. In order to make such a large tax cut politically palatable, and in order to conform to procedural rules in the Senate, Congress designed the bill such that most of the provisions were set to expire on December 31st, 2010.

The impending expiration of the Bush tax cuts became a major focus of the tax debate during the first decade of the century. The future of the Bush tax cuts was a central issue in the 2008 presidential campaign, in which John McCain advocated making almost all of the cuts permanent, and Barack Obama called for extending the cuts only for families earning less than $250,000.

However, when the cuts were finally due to expire in 2010, President Obama extended the cuts for yet another two years, seeking to avert a sudden and dramatic tax increase on American families in the middle of an economic recovery. As a result, the future of the Bush tax cuts became a major campaign issue in 2012 as well.

Ultimately, the fate of the Bush tax cuts was settled in the 2012 “fiscal cliff” deal, where Congress decided once and for all which of the cuts would be made permanent, and which would expire. While the Bush tax cuts are no longer a hot political issue, it is worth remembering that the future of the cuts occupied the attention of the tax policy community for over a decade.

Much of the bill has now been made into permanent law

The “fiscal cliff” deal cemented the vast majority of the 2001 and 2003 Bush tax cuts into permanent law. According to one estimate, 82 percent of the Bush tax cuts were made permanent in 2012, while only 18 percent were allowed to expire.

The deal was passed with large bipartisan majorities in both chambers, despite the fact that many Democrats initially opposed the tax cuts in 2001. This is, in large part, because Democrats simply did not want to raise taxes on low- and middle-class Americans. Allowing the Bush tax cuts to expire in full would have significantly increased the tax burden of households making under $250,000, a step that most legislators were unwilling to take.

The persistence of the Bush tax cuts for low- and middle- income Americans should be viewed as a major policy legacy of the Bush administration. In essence, George W. Bush argued that the middle class should pay a lower level of federal taxes, and basically no American politician has challenged this vision since. Perhaps the sole exception is Bernie Sanders, who has proposed across-the-board tax increases on Americans in every income group.

The bill focused on tax relief, rather than structural reform

The main focus of the Economic Growth and Tax Relief Reconciliation Act of 2001 was lowering taxes on all Americans. The bill cut the rates of the top four tax brackets by 3-4 points, added a new 10 percent bracket for low-income households, increased the standard deduction for married couples, and doubled the child tax credit.

Individual income tax rates in 2000 (before EGTRRA) for married couples filing jointly

Individual income tax rates in 2003 (after full phase-in of EGTRRA cuts) for married couples filing jointly

10%

$0 to $14,000

15%

$0 to $43,850

15%

$14,000 to $56,800

28%

$43,850 to $105,950

25%

$56,800 to $114,650

31%

$105,950 to $161,450

28%

$114,650 to $174,700

36%

$161,450 to $288,350

33%

$174,700 to $311,950

39.6%

$288,350 and over

35%

$311,950 and over

Note: bracket thresholds are expressed in nominal dollars of taxable income.

Notably, the 2001 tax bill did not contain many provisions that altered the structure of the U.S. tax code. The bill did not address the overabundance of credits, deductions, and exclusions in the individual tax code, nor did it significantly change the treatment of business investment. In other words, if the traditional template for tax reform is “broaden the base and lower the rate,” the 2001 Bush tax cuts only focused on the second half of this template.

The Republican Party has largely shifted away from the model of the 2001 tax bill

To a large extent, Republican lawmakers and presidential candidates have moved away from the approach of the 2001 tax bill: the model of large tax cuts for individuals and households without any offsetting base-broadeners or structural changes to the code. Congressmen such as Devin Nunes have focused their attention on the business tax code, rather than the individual income tax. Meanwhile, many of this year’s Republican presidential candidates have prioritized cutting back on itemized deductions and reimagining the business tax base.

The one exception is Donald Trump. Trump’s tax plan more or less follows the template of the 2001 tax bill, with large rate cuts for households of all income groups and with few proposals that would alter the structure of the U.S. tax code.


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