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For the week ahead of Tax Day 2011, Demos published daily writings, infographics, and illustrations that provided a fresh perspective on how we think about taxes.

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« Why Spending Caps Are Poor Policy | Main | Budgeting For America's Middle Class: A Report Card Comparing Federal Budget Proposals »

Tenth Anniversary of the Bush-era Tax Cuts

Tenth Anniversary of the Bush Tax CutsFmr. President George W. BushBy Andrew Fieldhouse and Ethan Pollack

Read The Full Policy Memo (PDF)

The Economic Growth and Tax Relief Reconciliation Act of 2001 (the first of a series of Bush-era tax changes) was enacted on June 7, 2001. Ten years later, the Bush tax cuts have exacerbated trends of widening income inequality, accompanied the weakest economic expansion since World War II, and turned budget surpluses into deficits. As detailed in a new Economic Policy Institute policy memorandum, these tax cuts were heavily targeted toward the wealthy at the expense of middle class families, poorly designed as an economic stimulus, and costly—significantly more so than advertised. 

Over the past 30 years, middle-class wages have stagnated despite robust productivity growth, while the wealthiest sliver of the population has captured greater shares of income growth and national wealth. Tax policy should be designed to promote economic fairness by pushing against the trend of ever-widening income inequality. Instead, the Bush-era (2001–08) tax changes actually increased inequality by delivering more than half of their benefits in 2010 to the top 10 percent of earners, who make over $170,000 a year. In fact, 38 percent of the dollar benefits went to the top 1 percent of earners (tax filers making over $645,000), who received tax breaks averaging over $100,000.

Click the image to download the full Policy Memo (PDF)

Working families, however, got the scraps. The bottom 60 percent of earners (making under $70,000 a year) received less than 20 percent of the benefits of these tax changes in 2010. And the tax cuts for the wealthy never trickled down to middle-class families: Inflation-adjusted median weekly earnings fell by 2.3 percent during the economic expansion from 2001Q4 to 2007Q4. While real wages fell for most Americans, the top 1 percent of earners captured a whopping 65 percent of all income gains, leaving just 13 percent for the bottom 90 percent.

These tax changes were no better for the overall economy than they were for middle-class paychecks. Between the end of the 2001 recession and the eve of the Great Recession in late 2007, the U.S. economy experienced the weakest economic expansion of the postwar era. Growth in investment, gross domestic product, and employment all posted their worst performance of any postwar expansion. Unemployment never returned to pre-recession levels. Contrary to conservative rhetoric, cutting taxes is not an economic cure-all.

Some policymakers, including Senate Minority Leader Mitch McConnell, would even have you believe that tax cuts don’t cost the government a dime because, allegedly, they pay for themselves through higher economic growth. This is a wildly false claim—one that has been disavowed by numerous Bush economic advisers and economists of nearly every ideological stripe. As previously noted, economic performance during the Bush-era expansion was relatively poor, income tax revenue immediately fell in response, and in real per capita terms tax revenue has never recovered. Federal tax revenue fell from 20.6 percent of GDP in FY2000 (the last year of the 1991-2000 expansion, when Clinton-era tax rates were in place) to 18.5 percent of GDP in FY2007 (the last year of the Bush economic expansion, when Bush-era tax rates were in place). The Clinton-era surpluses quickly turned to chronic structural budget deficits, largely due to repeated tax cuts and increased spending by the Department of Defense. From 2001 through 2010, these cuts added $2.6 trillion to the public debt, nearly half of the total debt accrued during this period.

Going forward, jobs must be the top national priority. Beyond creating hardship, reducing national output, and starving the government of revenue, the jobs crisis and persistently high unemployment also create downward wage pressures and threaten the living standards of working families. A deal last December extended all of the Bush-era tax changes through 2012, but soon Congress will once again have to decide whether to permanently extend all, part, or none of these tax changes. The dismal track record of the 2002-07 expansion suggests that a full extension, which would cost about $4.6 trillion over 2012-21, would fail to generate robust growth and thus wouldn’t create the 11 million jobs currently needed to return unemployment to pre-recession levels. Furthermore, it would fail to meaningfully benefit working families or support America’s vital but shrinking middle class.

Economic and tax policies must help to raise wages and foster shared prosperity, which means jettisoning tax cuts for the wealthy in favor of high-return public investments like education, infrastructure, and research spending. Unfortunately, the House Republican 2012 budget moves in the opposite direction, financing a full extension of the Bush tax cuts (and additional tax cuts) by slashing public investments, ending guaranteed Medicare, and eviscerating economic security programs such as Medicaid and food stamps. In this way, the Republican budget perfectly demonstrates that these tax cuts are not free, but rather come at a very high cost that our economy and our nation cannot afford.

After 10 years of a dismal economy, widening inequality, and squandered surpluses, it’s time to apply the lessons of the Bush-era tax cuts to public policy; the opportunity cost of the cuts simply remains  too high, particularly if the social contract of the last 80 years is further breached in return for more tax cuts for the privileged.

Read The Full Policy Memo (PDF)