The effect of Bush’s tax cuts policy
Name:S07490 Student ID：Li Tingxuan
Research paper supervisor:Dr.Seku Conde
Minzu University of China
2007-2008 Academic Year
Abstract: To some degree, it was the tax cuts policy makes George W. Bush win the American election twice. But after the election we could find that the design of these tax cuts was ill-conceived. It not only didn’t realize Bush’s previous preach but also had some bad effects to American society. So it is time to reconsider Bush’s tax cuts policy. This paper will take a comprehensive look on Bush’s tax cuts policy and then pay more attention to analyze the effect of this policy. It will assess the effect to government revenue, effect to distribution between different income groups and the effect to economic growth. By using new data from some special institution like Congressional Budget Office we can see the influence on these aspects clearly. First, the Bush tax cuts have contributed to government revenues dropping to the lowest level and have been a major contributor to the dramatic shift from large projected budget surpluses to projected deficits as far as the eye can see. Second, the tax-cut benefits from the proposals go overwhelmingly to the nation wealthiest individuals. The gap between the rich and poor is widening. And last, these tax cuts result in significantly less economic stimulus than could have been accomplished for the same budgetary cost. In all, we could find that the returns on the effect of tax cuts have not been very good.
According to the poll, 32% of American people consider the economy is the core of the election and especially the tax is the most important core of the economy. So the tax cuts policy will be a nice word to most of American people. To some degree it will make them to vote the candidate who advocates tax cuts. When we look back we will found that in the history the tax cuts policy indeed took an important role in winning the election. Because of this reason George W. Bush who advocates large tax cuts won American election twice. He preached that the tax cuts policy would make American people have more money in hand, will stimulate economic growth and create more job opportunity. Before the election he said that:“I believe that our economy grows and the American Dream reaches more citizens when you keep more of what you earn. With more money in your pocket, it is easier for families to afford a good education, it is easier for young people to afford the down payment on a home of their own, and it's easier for small business owners to go out and invest and create jobs. So my administration and the Republican Congress enacted the largest tax relief since Ronald Reagan was in the White House. We cut taxes for every American who pays income taxes. We doubled the child tax credit. We reduced the marriage penalty. We cut taxes on small business. We cut taxes on capital gains and dividends to promote investment and jobs. And to reward family businesses and farmers for a lifetime of hard work and savings, we put the death tax on the path to extinction.”[1] His words pleased most of common people and ultimately got the position of American president easily. And during his first term, Bush sought and obtained Congressional approval for tax cuts: the Economic Growth and Tax Relief Reconciliation Act of 2001, the Job Creation and Worker Assistance Act of 2002 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. These acts decreased all tax rates, reduced the capital gains tax, increased the child tax credit and eliminated the so-called "marriage penalty." When he faced opposition in Congress for an initially proposed $1.6 trillion tax cut[2], Bush held town hall-style public meetings across the nation in 2001 to increase public support for it. Bush and some of his economic advisers argued that unspent government funds should be returned to taxpayers. With reports of the threat of recession from Federal Reserve Chairman Alan Greenspan, Bush argued that such a tax cut would stimulate the economy and create jobs. In the end, five Senate Democrats crossed party lines to join Republicans in approving a $1.35 trillion tax cut program[3] — one of the largest in U.S. history.
However, in my opinion, the large tax cuts had much more bad effects than Bush’s previous preach. Therefore in this paper I’ll offer a comprehensive review of the Bush tax cuts and analyze the effects to government revenue, distribution and economy. After that we will find that the early returns on the effects of the tax cuts have not been very good.
· The effect to government revenue
Maybe there are some reasons have been advanced for tax cuts and among them the major reason is considered that government is taking in more revenue than it needs to pay for current obligations. This argument is invalid. Usually although government seems to have large budget surplus these money is useful to many affairs necessary. Most of the surplus must be invested into the social security. Leaders of both parties agree that the trust fund should be preserved for social security, which has significant unfunded liabilities. Another part consists of surpluses in the military and civilian pensions and Medicare programs that will be needed to meet future benefit commitments. Thus the same logic that establishes the imprudence of basing tax cuts on social security surpluses applies equally to accumulations in these trust funds. The remaining projected surplus exists only because of high restrictive and unrealistic assumptions regarding cuts in real discretionary spending for national defense and domestic programs. Under more plausible assumption about discretionary spending and the preservation of pension and health reserves, there will be no surplus available for tax cuts. Only “after these problems are resolved, it will be appropriate to debate whether any remaining surpluses should be used for tax cuts, spending in creases, or debt repayment.”[4]
Therefore if the government executes the tax cuts policy the deficit problem will come on or even get worse. Taking 2004 for example, after three rounds of tax-cut legislation in 2001, 2002, and 2003 the deficit problem in 2004 was very serious. The Bush’s tax cuts legislation had contributed to revenues dropping in 2004 to the lowest level as a share of the economy since 1950, and had been a major contributor to the dramatic shift from large projected budget surpluses to projected deficits as far as the eye can see. “The tax cuts reduced revenues by $276 billion in 2004, according to Joint Committee on Taxation estimates. Further, the interest costs associated with the enacted tax cuts was equal $20 billion, using Congressional Budget Office assumptions. Therefore the total cost was $297 billion, or 2.6 percent of the economy (or GDP). Using these estimates, the cost of the tax cuts accounted for more than half of the 2004 deficit, which CBO estimated to be $477 billion or 4.2 percent of GDP, while the deficit would have been only 1.6 percent of GDP without the tax cuts.”[5] These calculations, however, did not take into account the economic effects of the tax cuts. Most economic analyses suggested that the tax cuts had had some positive effect on the economy in the short run at issue was the extent of this positive effect given their cost. These positive effects would make the short-run revenue losses associated with tax cuts somewhat smaller, and estimates of the deficit without the tax cuts somewhat higher. Nevertheless, even using the Administration assumptions about the economic effects of its tax cuts, the tax cuts still accounted for 45 percent of the 2004 deficit.
Table 1
Tax Cuts and the 2004 Deficit
As Percent of GDP
2004 deficit with tax cuts
4.2%
Cost of tax cuts
2.6%
2004 deficit without tax cuts
1.6%
CBO also figured out that “federal revenues fall to their lowest level as a share of GDP, only 15.8 percent in 2004. In contrast, total federal spending in 2004 was almost as same as the average spending during 1980 to 2003. So the deficit grew amazingly from 2.6% to 4.2%.” [6]
Table 2
Historically Low Revenues, Not High Spending, Behind Current Deficit
As Percent of GDP
Average, 1980-2003
2004
Spending
21.1%
20.0%
Revenue
18.5%
15.8%
Deficit
2.6%
4.2%
Owing to the deficit there were some bad effects on many aspects such as military expenditures, homeland security, educational spending and so on. Government had to reduce the spending on some affairs and the financial burden would exert on common American people. The legislation “extended the $1,000-per-child tax credit, rather than letting it slip back to $700 next year. It also extended tax breaks for married couples that otherwise would also have to be trimmed in 2005. And it prevented the 10 percent income-tax bracket from being applied to smaller amounts of earned income, as was the case in the past”.[7] Besides, if reduced the expenditures on military country’s security also would be a big problem.
The three rounds of tax-cut legislation in 2001, 2002, and 2003 also had a profound effect to the long future. The costs of these tax [...]
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