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The Truth About the Bush Tax Cuts

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Who really benefits?

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It's been said a lot in the last five years: President Bush's tax cuts benefit the rich.

Response to the allegation depends on how you define "rich," how you view the tax code and what you see as the purpose of the Internal Revenue Service.

First, a basic truth: A 1% across-the-board tax cut puts more dollars in the pocket of an entrepreneur earning $1,000,000 a year than a mechanic making $50,000. Is it unfair?

The Congressional Budget Office reports that between 2000 and 2004, the share of all federal taxes paid by the top 20% of the nation's wage earners rose to 67.1% from 66.6%. Meanwhile, the share of the bottom 40% dipped to 5.4% from 5.9%. For income taxes, the share of the top 20% of households rose to 85% from 81%.

In 2000, the top 60% of the nation's earners paid 100% of all income taxes and the bottom 40% paid no income taxes. Lawmakers have long used the tax code to subsidize low income earners, creating what some have called a negative tax burden. Negative because many low-income earners receive tax refunds greater than the amount of all federal taxes paid. Under Bush's tax cuts, the number of filers with no taxes, or negative liability, increased to 40 million from 30 million. The controversial tax cuts also reduced the burden on the lowest tax bracket to 10% from 15%.

When sizing up Bush's tax cuts the ever-changing definition of "rich" is unavoidable. Families with taxable incomes of $62,000, and single taxpayers with incomes of $31,000, benefit directly from Bush's tax cuts. If that's the definition of rich, especially in high tax Minyanville's Taken to Taxstates such as New York, California and Massachusetts, we're all populists. But if you believe the Internal Revenue Service is in the business of redistributing income, Bush's tax cuts are unfair, because those at the top of the income pyramid receive a bigger fistful of dollars from tax cuts than those at the bottom.

Interesting to note, Bush's tax cuts have increased tax receipts, enabling the IRS to raise revenue used to fund the government. This is keeping with the theory of supply-side economics:

  • Tax receipts are based on the size of the tax base and the tax rate.

  • Raising taxes on earned income and capital gains discourages work and investment, limiting growth and shrinking the tax base.

  • Cutting tax rates reduces the cost of taxed actions, boosting take-home pay and encouraging increased economic activity and investment. This expands the economy and tax base, which translates into higher tax receipts for the government.

Marginal tax rates were slashed in the 1920s, 1960s and 1980s, and each cut sparked increased economic growth. The Heritage Foundation, a conservative think tank based in Washington, D.C., says real gross domestic product grew by 59% from 1921 to 1929, by 42% from 1961 to 1968 and by 31% from 1982 to 1989. Growth during the 1980s was off a larger base than growth in the 1920s, and that explains the apparent slowdown in the rate of increase.

In 2003, Congress passed Bush's tax measures, cutting the top capital gains rate to 15% from 20% and reducing the top individual rate on dividends to 15% from 35%.

While GDP grew about 1.7% and the economy shed 267,000 jobs in the six quarters prior to Bush's tax cuts, growth topped out at just over 4% and 307,000 new jobs were created in the six quarters following their introduction. Roughly five million jobs were added in the seven quarters that followed.

Critics counter that deficits soared during the Reagan and Bush years. True. But the culprit is increased spending, not lower taxes. Capital gains revenue has nearly doubled to about $103 billion since 2003.

Bush's tax cuts are scheduled to expire in 2010. This creates a difficult situation for Democrats, who currently control Congress. If the tax cuts are allowed to expire, Republicans will say that Democrats, in effect, approved a $2 trillion tax hike.

A conservative would say current tax policies are on the right track, but spending has been irresponsible. A liberal would criticize the administration's tax and spending plans. Got a preference? That's why we have elections.

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