The Bush Tax Cuts Just Did Not Deliver

November 19, 2010 10:31 am ET

If the Republican Party's various supply-side arguments for extending the Bush tax cuts seem familiar, that's because they are. The conservative arguments for more tax cuts mirror the lofty claims President George W. Bush made when he signed the 2001 and 2003 tax cuts into law. Bush promised economic growth and sustained prosperity; the economy got neither. In fact, from 2001 to 2007, the country experienced the weakest job growth since the end of World War II. While the nation's millionaires and billionaires got rich, average household income fell for the first time on record. In response to the recession, the Obama administration has proposed extending tax cuts for all but the wealthiest of Americans. Republicans want the rates extended for everyone, including athletes, movie stars, and billionaire hedge fund managers. These people are not likely to spend the extra money and not likely to stimulate the economy, but Republicans swear by discredited economic theories and warn that higher rates will hurt small businesses. There is little evidence for that. In fact, there is no greater evidence that tax cuts for the rich fail to lift all boats than the costly and ineffective Bush tax cuts.

Bush Tax Cuts Failed To Deliver

During Bush Years, Household Income Declined For First Time On Record. According to a report by the Center for American Progress: "The Bush economic cycle saw the first decline in median household incomes of any cycle since 1967, when the Census Bureau began tracking household data."

Household Incomes

[Center for American Progress, February 2009]

Bush Tax Cuts Inefficient, Didn't Stimulate The Economy. According to the Tax Policy Center's William Gale: "Economic research over the past decade can explain why extending the original Bush tax cuts is not good stimulus policy. After the tax rebates in 2001, 2003, and 2008, households appear to have spent in relatively short order somewhere between 25 and 67 cents more for each dollar of tax cut. This makes tax cuts in general - even the parts of those tax bills that were intended to stimulate - a relatively weak way to help the economy compared to increases in government purchases, for which each dollar of increased deficit turns into an additional dollar of spending." [Tax Policy Center, 9/30/10]

Bush Tax Cuts Followed By Weakest Jobs And Income Growth In Post-War Period. According to a report by the Center for American Progress, the Bush tax cuts failed to deliver jobs and income growth: "This period registered the weakest jobs and income growth in the post-war period. Overall monthly job growth was the worst of any cycle since at least February 1945, and household income growth was negative for the first cycle since tracking began in 1967. Women reversed employment gains of previous cycles. And for African Americans, the worst job growth on record was matched by an unprecedented increase in poverty." [Center for American Progress, February 2009]

Bush Tax Cuts Followed By "The Slowest Average Annual Growth Since World War II." As the New York Times' David Leonhardt explains:

Those tax cuts passed in 2001 amid big promises about what they would do for the economy. What followed? The decade with the slowest average annual growth since World War II. Amazingly, that statement is true even if you forget about the Great Recession and simply look at 2001-7.

The competition for slowest growth is not even close, either. Growth from 2001 to 2007 averaged 2.39 percent a year (and growth from 2001 through the third quarter of 2010 averaged 1.66 percent). The decade with the second-worst showing for growth was 1971 to 1980 - the dreaded 1970s - but it still had 3.21 percent average growth.

The picture does not change if you instead look at five-year periods. Here's a chart ranking five-year periods over the past 50 years, in descending order of average annual growth:


Is there good evidence the tax cuts persuaded more people to join the work force (because they would be able to keep more of their income)? Not really. The labor-force participation rate fell in the years after 2001 and has never again approached its record in the year 2000.

Is there evidence that the tax cuts led to a lot of entrepreneurship and innovation? Again, no. The rate at which start-up businesses created jobs fell during the past decade.

[New York Times, 11/18/10]

Heritage Foundation Budget Guru: Bush Tax Cuts Played Some Role In Lower Revenues. As the Heritage Foundation's Brian Riedl admits: "the 2001/2003 tax cuts played some role in keeping revenues below their historical average for most of the 2000s, but the country was also recovering from a recession at that time, too." [Heritage Foundation, 7/29/10]

Bush Cuts Followed By Slowest Jobs Growth Since The End Of World War II. According to a report by the Center for American Progress, "from March 2001 to December 2007 the economy added 1.8 million jobs for workers aged 25 to 54, only 22,000 per month. That translates to an average annualized growth rate of only 0.3 percent per month-the slowest of any cycle on record since the end of World War II and one-fifth the growth rate during the 1990s."

Job Growth

[Center for American Progress, February 2009]

Bush Tax Cuts Are Costly, Add To Deficit And Debt

The Bush Tax Cuts Are The Primary Driver Of Federal Budget Deficits Over The Next Decade. Below is a chart from CBPP showing the deficit impacts of war spending, financial recovery spending, the recession itself, and the Bush tax cuts:

[, 6/28/10]

Continuing Bush Tax Cuts Doom The Long-Term Fiscal Picture. As the Tax Policy Center's William Gale has explained: "The deficits we face over the next decade reflect a fundamental imbalance between spending and revenue, one that goes beyond entitlements. Based on projections by the CBO, Alan Auerbach of the University of California at Berkeley and myself, among others, even if the economy returns to full employment by 2014 and stays there for the rest of the decade, the continuation of current fiscal policies, including the Bush tax cuts, would lead to a national debt in the range of 90 percent of GDP by 2020. That's already the highest rate since just after World War II -- and Medicare, Medicaid and Social Security aren't expected to hit their steepest spending increases until after 2020." [Washington Post, 8/1/10]

Extending Bush Tax Cuts "Would Increase The Debt By An Amount Roughly Equal To The Size Of The Economy." As the Center for Budget and Policy Priorities points out, tax cuts do not pay for themselves. In fact, if an unpaid-for extension is enacted, by 2050, the national debt "would increase the debt by an amount roughly equal to the size of the economy."

[CBPP, 11/16/10]

Expiration of Tax Cuts Won't Hurt Small Business

Letting Bush Tax Cuts Expire Won't Hurt Small Businesses. As the Tax Policy Center's William Gale has explained:

Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets -- individuals earning more than about $170,000 a year and families earning more than about $210,000 a year.

And just as most small businesses aren't owned by people in the top income brackets, most people in the top income brackets don't rely mainly on small-business income: According to the Tax Policy Center, such proceeds make up a majority of income for about 40 percent of households in the top income bracket and a third of households in the second-highest bracket. If the objective is to help small businesses, continuing the Bush tax cuts on high-income taxpayers isn't the way to go -- it would miss more than 98 percent of small-business owners and would primarily help people who don't make most of their money off those businesses.

[Washington Post, 8/1/10]

Allowing Tax Cuts For The Rich To Expire Will Not "Adversely Affect Small Business And Job Growth." According to the Congressional Research Service, "Research has shown that tax cuts directed to high income taxpayers have a small stimulative effect because they tend to save any additional income. Increasing tax rates for the richest 2% of taxpayers (by allowing the high income tax cuts to expire) will likely neither significantly decrease consumer expenditures nor adversely affect small business and job growth." [Congressional Research Service, 10/27/10, internal citation deleted for clarity]

Just 12 Percent Of Money Raised By Increasing Top Rates Comes From "Small Businesses With Actual Workers." As reported by Businessweek: "The nonpartisan Congressional Research Service, which analyzes issues for lawmakers, largely agreed with Obama in a Sept. 3 report that considered only taxpayers with employees. Its conclusion: Small businesses with actual workers would pay only about 12 percent of the higher taxes. 'Across-the-board tax cuts for high-income individuals are not efficiently targeted to small businesses,' wrote author Jane G. Gravelle." [Businessweek, 9/23/10]

Only 3 Percent Of People In Top Brackets Have Any Business Income At All. From the Center for American Progress: "But according to the Joint Committee on Taxation, just 3 percent of people with any business income at all-from an enterprise large or small-face either of the top two income tax brackets, which are the ones in question. Conservatives eventually conceded this point, but pivoted to the literal number of 'small businesses' that they claim will be affected if the tax cuts for the rich expire." [Center for American Progress, 11/15/10]

Bloomberg: GOP Definition Of Small Business Includes "George Soros, Most Movie Stars And Obama Himself." According to Bloomberg:

Senate Republican leader Mitch McConnell says President Barack Obama wants to subject half of all small-business income to a tax increase, a move that he says would strike a blow at the U.S. job-creation engine.

McConnell's numbers only add up if you consider people like billionaire investor George Soros, most movie stars and Obama himself small-business owners, tax experts say.

That's because the lawmaker is basing his figure on a broad definition of the term that experts say includes authors, actors and athletes who employ few if any workers. It also encompasses businesses that many people wouldn't consider small, such as Soros's hedge-fund firm and major law partnerships. [Bloomberg, 9/20/10]

Allowing Tax Cuts For The Rich To Expire Wouldn't Stifle Economy Recovery. According to the Congressional Research Service, "allowing the tax cuts targeted to high income taxpayers to expire as scheduled could help reduce budget deficits in the short-term without stifling the economic recovery." [Congressional Research Service, 10/27/10]

More Money For Millionaires

Richest One-Tenth Of 1 Percent Will Benefit Most From Extension Of All Tax Cuts. As Princeton economist Paul Krugman explains, "the majority of the tax cuts would go to the richest one-tenth of 1 percent. Take a group of 1,000 randomly selected Americans, and pick the one with the highest income; he's going to get the majority of that group's tax break. And the average tax break for those lucky few - the poorest members of the group have annual incomes of more than $2 million, and the average member makes more than $7 million a year - would be $3 million over the course of the next decade." [New York Times, 8/22/10]