The 2001 Bush Income Tax Cut: A Major Policy Mistake

Posted Sep 9th 2010 6:00PM by Joseph Lazzaro
Filed under: Politics

George Bush The 2001 Bush income tax cut is one of those issues whose fate has been sealed by objective economic conditions.

Simply, if the U.S. economy had registered robust growth during the final two years of the Bush administration, and no other negative economic events occurred, the tax cut, which will increase the deficit by $336 billion this fiscal year, $295 billion in fiscal 2011, and by more than $320 billion per year through fiscal 2019, perhaps would have had a chance of being extended.

But that robust GDP growth did not occur. Neither did robust job growth. The tax cut did, however, instantaneously turn a federal budget surplus into a budget deficit. Further, failing to phase-out the tax cut would seriously impair the nation's ability to balance the federal budget.

Must Avoid Rattling Bond Market

Equally important, extending the tax cuts would send the wrong signal to credit markets. The bond market has already factored-in the expiration of the 2001 Bush tax cut, and the lower budget deficit it implies. Reverse that policy and the bond market is not likely to pleased, to say the least. Rattled is more like it, and another financial shockwave is not what credit markets need, given that they've only semi-healed from the first two shockwaves (Lehman Bros. collapse, European debt crisis). If the tax cuts don't expire, U.S. interest rates would likely rise, and the dollar would probably weaken even more -- with the latter pushing dollar-based commodity prices higher, especially oil.

Further, congressional Republicans don't appear to be willing to compromise with President Obama and congressional Democrats on the income tax issue -- their view is 'retain them in full or nothing' -- hence the tax cuts that favor upper-income citizens will likely expire.

Also, the literature is mixed regarding the GDP-impact from extending the cuts: Some times upper-income investors flush with extra cash act in ways that stimulate U.S. GDP growth, sometimes they don't. And most of the literature also says only a minute segment (up to 5%) of small businesses will be substantially hurt by seeing the tax cuts expire.

Fiscal/Economic Analysis: The clincher in the debate is the bond market. You think actions that rattle the stock market are best avoided -- trust me -- you really don't want to rattle the bond market. The expiration of the tax cuts will result in an extra, cool $300 billion and up rolling into the U.S. Treasury's coffers each year -- dramatically improving the nation's fiscal condition. In other words, the United States will be better than one-third of the way toward a balanced budget -- and that's sweet music for bond owners' ears.

Tags: bond market, budget deficit, Bush tax cut, Democrats, featured, income taxes, interest rates, Obama, Republicans

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Reader Comments (Page 1 of 1)

9-09-2010 @ 7:33PM

paul34 said...

Tax cuts were the issue?

In any budget, there are two basic components: income and expenditures.

If you go out to steakhouses every night then have a pay cut at work so that your business survives (and you don't lose your job), you don't complain when your credit card bill comes in and you can't afford to pay. You realize your mistake of continuing to eat steakhouse steak every night, then promise to cut back on the expenditures to a more prudent level.

The problem wasn't the Bush tax cuts. The problem is the massive failure by both R and D to reduce expenditures. The problem is continuing two massively expensive wars. The problem is throwing money into a fire known as "stimulus." The problem is propping up bad business and rewarding corruption and greed by bailing out failed banks and businesses.

It is often quite surprising to me that many in the mainstream media cannot fathom a solution other than increasing taxes. Ever thought of spending less in the first place? Permanent deficit reduction? A return to a manageable central government? What silly concepts, huh?

9-09-2010 @ 8:08PM

MC said...

paul34... THANK YOU! You took the words right out of my mouth! Life is just not as simple as those in government wish us to believe - one can not simply demand, and get more money to cover unregulated spending in government, or within our own personal households! It would be nice if when I ran out of money I could tell my boss that I needed more, and he gave it to me! But if I did, and he did, I would run out again... and again demand more... and so on, and so on! Government acts in that same manner, except we do not have a choice, that is, until we stand up to them. BIG government is getting BIGGER? Government spends our money with no sense of responsibility for their actions, and the taxpayer is expected to do with LESS?
PLEASE EXPLAIN WHY!

TIME TO BOOT THE BUMS OUT. KICK THEM ALL TO THE CURB, AND START OVER!

9-09-2010 @ 10:54PM

Peter Van Schaik said...

Actually, federal income tax increases on the wealthiest can lead to greater economic growth: The federal government spends its money on goods and services, which stimulates the economy, while the wealthy spend a disproportionate share of their money on investments, both domestic and foreign, which doesn't necessarily lead to an increase in real economic activity in the United States, especially when capacity utilization is hovering in the mid 70's and below. For more details than I can go into here see http://ezinearticles.com/?Economic-Growth-and-Income-Tax-Rates&id=2334092

9-09-2010 @ 11:42PM

Peter Van Schaik said...

And let's not forget that while the Federal debt is high, it is backed by numerous assets. To list just a few: 46,876 miles of interstate highway; 58 National Parks (which includes some 79 million acres of land); 74 National Monuments; at leasty 1,600 buildings; aircraft carriers; jet planes; atomic bombs. The list could go on for quite awhile but you should be getting the general idea by now: We have, and continue to get, some value in return for our tax dollars. http://sites.google.com/site/jpetervanschaik/

9-10-2010 @ 7:07AM

Chris said...

Call it what you will, trickle down economics have not worked. We pontificate about how we top income earners prop up the economy but we really don't and you know it. We add to the portfolio, buy the kid a BMW or get that lake property we've been looking at but we're not really feeding it back into the economy in a positive way. Retaining the Bush tax cuts for the top 5% is a myopic approach that will ultimately hurt the economy more that it already has. I'm one of the people who'll take a hit when the tax cuts expire but I'd rather bleed a little now than hemorrhage out later. Raise your view folks, there are larger considerations than your club's membership dues.

9-10-2010 @ 12:21PM

thedude said...

When taxes are increased on wealthy people they simply move their money to foreign countries. Switzerland, Caymen Isles, Lichtenstein, wherever they can earn interest and pay few (if any) taxes on it.

Charge someone 30% per year on one million in income and they will figure a way to cut their pay to $100,000.00 and have the rest transferred to foreign accounts. Wealthy people are not going to pay more in taxes then they can earn in interest.

Also, wealthy people are bigger spenders and the income generated in sales tax alone is more then most people pay in income taxes. Sales tax on a BMW M3 approach $8,000.00 in some states plus another $5,000.00 Gas Guzzler tax