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Debate still rages on impact of tax cuts
Question of the Day
At a White House event last week commemorating the fifth anniversary of the 2003 tax cuts and the seventh anniversary of the 2001 tax cuts, President Bush hailed the “52 months of uninterrupted job growth” that commenced shortly after the 2003 tax cuts were passed.
“There’s no question that the tax cuts provided economic vitality,” Mr. Bush said.
However, politicians and economists disagree about the extent of the economic benefits generated by the tax cuts.
“This president’s fiscal failures are manifest,” Senate Budget Committee Chairman Kent Conrad said on the Senate floor last week. Those failures, the North Dakota Democrat said, “are written across the pages of the economic history of this country.”
The costs of the tax cuts “vastly outweigh any benefits,” economist Josh Bivens said. “The only benefit from the tax cuts is increased disposable income. I think they have had negative impacts on growth, the deficit and equity.”
“The benefits of the tax cuts have been manifold,” countered Ryan Ellis, tax-policy director of Americans for Tax Reform. “The lower tax rates on dividends and capital gains surely led” to higher stock prices, he said, citing the $3.7 trillion increase in stock-market value and the $13.6 trillion increase in household net worth since 2003.
Disputes about “economic vitality” aside, there is no question that tax relief has been huge.
The Bush tax cuts were broad and deep. The 10-year, $1.35 trillion tax cut enacted in 2001 introduced a 10 percent tax bracket. That immediately provided $600 in annual tax relief for married couples with taxable income of at least $12,000.
The 2001 law eventually doubled the child tax credit from $500 to $1,000. It also eliminated the so-called “marriage penalty” for couples with taxable incomes up to nearly $55,000 and reduced the penalty for others. The top individual income-tax rate, which was increased from 28 percent to 31 percent in 1990 and then to 39.6 percent in 1993, was lowered to 35 percent. Three other tax rates were each reduced by 3 percentage points.
The 2001 law also increased incentives to save for retirement by raising contribution limits for IRAs and 401(k) pension plans. The law also phased in a repeal of the estate tax by 2010.
The 2003 bill reduced taxes by $330 billion over five years. Principally, it lowered the top dividend-tax rate from 39.6 percent in 2000 to 15 percent and the top capital-gains tax rate from 20 percent to 15 percent.
So, how has the economy performed since Mr. Bush signed the tax-relief bills?
The 2001 tax cut was passed two months into an eight-month recession that began in March. Even though the recession officially ended that November, the economy remained sluggish and employment continued to decline until the summer of 2003.
As evidence of “economic vitality,” the president cites more than six consecutive years of uninterrupted economic growth. Moreover, productivity growth has averaged more than 2.5 percent per year throughout the Bush administration - higher than the averages achieved during each of the three previous decades.
The unemployment rate averaged 5.2 percent during the first seven years of the Bush administration and stood at 5.5 percent in May, having jumped half a percentage point last month. Both levels were lower than the average unemployment rate during the 1970s (6.2 percent), 1980s (7.3 percent) and 1990s (5.75 percent).
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