Who Benefited Most from the Bush Tax Cuts?

May 26, 2010

With the possible exception of the war in Iraq, no single policy question was more debated during President Bush’s term than who benefited most from the tax cuts that were passed while he was in office.

Critics of the tax cuts not only charged that the tax cuts were unaffordable, but that too large a share of the tax cuts went to taxpayers with the highest incomes.

The answer to the question of who benefited the most from the tax cuts ultimately depends upon answers to two other questions: (1) How do you measure benefit and (2) How are the tax cuts financed?

Ignoring the financing, the answer to the question depends upon how you measure “benefit.” Normally, tax cuts are measured in the same way as raises at work: What percentage did you get? If a person making $40,000 gets a 20% raise to $48,000, obviously that’s a “better raise” than a person who gets a 5% raise from $200,000 to $210,000. However, if one looks solely at the dollar amounts, the higher-income person got a $10,000 raise while the lower-income person got $8,000.

It is similar for tax cuts. Virtually every tax return received a tax cut as a result of the 2001 and 2003 Bush tax cuts. Even many tax returns at the very bottom of the income scale who paid no income tax to the IRS saw an increase in their refundable credit amount. That’s why if one measures “benefit” in terms of the percent change in one’s tax bill, low-income earners benefited the most from the tax cuts. However, if raw dollar amounts per person is what one measures, then the higher-income the person, the more benefits the tax cuts delivered.

On the other hand, liberal groups such as the Center on Budget and Policy Priorities point to the fact that after-tax income inequality (as measured by shares of after-tax income) being higher as a result of the tax cuts proves that the tax cuts were regressive. Taken to its extreme, however, this position could lead to the paradox where redistribution to low-income earners actually increased but tax progressivity actually fell.

If one brings the financing question into the equation, the answer is even more ambiguous. If spending reductions finance tax cuts, then the rich benefit more because low-income earners benefit disproportionately from government spending (as a whole).

If other tax hikes have financed the tax cuts, then it depends on whether that tax hike is more or less regressive than the Bush tax cuts. If such a tax hike were an across-the-board tax like a VAT, then it would likely be the case that the Bush tax cuts benefited the rich the most. If the tax cuts are eventually financed by tax increases on high-income earners only, then such a policy over time would be a progressive shift in taxation.

Note that technically, if one looks at the question from a generational distributive perspective, the answer to whether “the rich” or “the poor” benefited most is somewhat ambiguous. Future generations are almost always wealthier than previous generations, which would mean, for example, that deficit-financed tax cuts in one generation at the expense of future generations, ceteris paribus, would actually be progressive. On the other hand, if the future tax hike is significantly more regressive than the current generation tax cut (such as a VAT being put in place relatively soon to finance the Bush tax cuts), the intergenerational redistribution may actually be regressive.


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