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).
J.D. Foster, an economist at the conservative Heritage Foundation, agrees that the tax cuts were beneficial. “The tax cuts contributed to four years of robust growth and even today are providing strong support in the face of the powerful shocks to the economy from the housing sector and the credit crunch,” Mr. Foster said.
However, Aviva Aron-Dine, a policy analyst at the liberal Center on Budget and Policy Priorities, believes data on the 2001-2007 expansion “provides no support for the claim that tax cuts generated exceptional economic growth.”
After reviewing all 10 expansions since World War II, Ms. Aron-Dine found that “the 2001-2007 expansion was either the weakest or among the weakest” with respect to gross domestic product, consumption, investment, wage and salary, and employment growth.
In fact, the growth rates for employment and wages and salaries were “lower than in any previous post-World War II expansion,” she said, adding that the growth rate for household net worth was below average.
Bigger budgets,
soaring debt
Both the budget deficit and the national debt have skyrocketed during the Bush administration, something economists attribute to both the 2001 recession and lower tax revenues attributed to the administration’s tax cuts.
Compared to budget surpluses that averaged $140 billion from 1998 through 2001, budget deficits averaged $280 billion throughout the 2002-2007 period.
Meanwhile, as budget deficits mounted, annual increases in the national debt soared even more. The rising tide includes the hundreds of billions of dollars the federal government borrows each year from trust funds (for example, Social Security) that are generating temporary surpluses. Thus, the national debt, which had increased from $5.4 trillion at the end of fiscal 1997 to $5.8 trillion at the end of fiscal 2001, will exceed $10.4 trillion by the end of fiscal 2009, according to the White House Office of Management and Budget.
The White House points out that the 2007 budget deficit ($162 billion) was 1.2 percent of GDP, “well below the 40-year average.”
“Economic growth contributed to the highest tax revenues on record and a $250 billion drop in the deficit over the last three years,” the White House argued in a fact sheet issued in January. However, the fiscal 2009 budget released in February revealed budget-deficit estimates of $410 billion for 2008 and $407 billion for 2009. Both estimates approach the record budget deficit of $413 billion in 2004. Moreover, the White House budget office projects that the national debt will increase by $703 billion in 2008 and $759 billion in 2009. Never before has the national debt increased by as much as $600 billion in a single year.
That debt load doesn’t worry Mr. Foster of the Heritage Foundation. “Despite the ongoing costs of the war and the recently enacted ‘stimulus’ package, the near-term deficit remains quite manageable, and debt levels as a share of GDP remain moderate by historical standards,” he said.
The national debt peaked at 122 percent of GDP at the end of World War II. It steadily declined to 33 percent in 1981, increased to 67 percent in the mid-1980s, retreated to 57 percent in 2001 and is projected to exceed 69 percent of GDP next year.
Mr. Ellis of Americans for Tax Reform isn’t very worried about the rising budget deficits, either.
“Budget deficits are such a small part of the economic equation, they are to be ignored,” Mr. Ellis said. “When compared to the balance sheet of the nation,” he added, they are “minuscule.”
Ms. Aron-Dine, on the other hand, is greatly concerned. “Current federal budget and tax policies are unsustainable over the long run,” she said in an interview. Moreover, because “tax cuts do not pay for themselves, today’s deficit-financed tax cuts will eventually have to be paid for with tomorrow’s program cuts or tax increases.”
She also asserts that “the 2001 and 2003 tax cuts did not lead to a shining economic performance.” Since the recession ended in late 2001, annual economic growth has averaged less than 2.7 percent through the first quarter of this year. Since mid-2003, following the 2003 tax cuts, annual economic growth has averaged 2.9 percent.
By comparison, economic growth averaged 3.6 percent per year during the entire Clinton administration and 3.9 percent per year during its last four years.
“Even relative to the 1990s, when taxes were increased significantly during the early stages of the expansion, the economy’s performance after these [2001 and 2003] tax cuts was disappointing,” Ms. Aron-Dine said.
Jobs, incomes grow slowly
If the unemployment rate has performed admirably during the Bush administration, the same cannot be said for job growth.
After the economy shed nearly 1.8 million jobs during recession-plagued 2001, employment has increased by 7 million jobs through May. The average monthly increase since the beginning of 2002 was 91,000 jobs.
Between the middle of 2003 and May 2008, employment grew by 7.9 million jobs, averaging 134,000 new jobs per month. This period included the 52 consecutive months of job growth that Mr. Bush hailed in his January State of the Union address and at the White House last week.
By comparison, employment increased an average of nearly 240,000 jobs per month during the last four years of the Clinton administration. That’s nearly 150,000 more jobs per month than the 91,000 monthly jobs that have been added during the Bush economic expansion.
Likewise, the tax cuts have not been very successful in boosting pretax median family income.
Adjusted for inflation and expressed in 2006 purchasing power, median family income increased from $50,792 in 1993 to its cyclical peak of $59,398 in 2000, according to Census Bureau data published in the 2008 Economic Report of the President. For 2006, however, pretax median family income totaled $58,407, nearly $1,000 below its peak reached six years earlier.
For two-parent middle-class families with two children, the 2001 and 2003 tax cuts have been helpful in reducing their income-tax burden. The White House calculates that a family of four earning $60,000 would see its taxes increase about $1,900, or 70 percent, if the tax cuts are allowed to expire as scheduled at the end of 2010.
A single parent with two children earning $30,000 would incur a $1,600 tax increase, and a family of four earning $40,000 would see its income-tax burden rise by $2,300, according to White House estimates.
These current income-tax savings relate mostly to the $500-per-child increase in the child tax credit, the new 10 percent tax bracket and marriage-penalty relief. The five-year budget blueprint passed by Congress last week assumes that all three of those middle-class tax cuts will be extended beyond 2010.
Mr. Ellis of Americans for Tax Reform belittled those cuts.
“The child tax-credit doubling and marriage-penalty amelioration didn’t do squat for economic growth,” he said, but then added: “No tax cut is unhelpful, because it deprives the government of money.”
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