The Bush Tax Cuts and the Economy
Thomas L. Hungerford
Specialist in Public Finance
December 8, 2010
Congressional Research Service
7-5700
www.crs.gov
R41393
CRS Report for Congress
P
repared for Members and Committees of Congress
The Bush Tax Cuts and the Economy
Summary
A series of tax cuts were enacted early in the George W. Bush Administration by the Economic
Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and the Jobs and
Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27). These tax cuts, which are
collectively known as the Bush tax cuts, are scheduled to expire at the end of 2010. Beginning in
2011, many of the individual income tax parameters (such as tax rates) will revert back to 2000
levels. The major tax provisions in EGTRRA and JGTRRA that are part of the current debate
over the Bush tax cuts are the reduced tax rates, the reduction of the marriage penalty (and
increase in the marriage bonus), the repeal of the personal exemption phaseout and the limitation
on itemized deductions, the reduced tax rates on long-term capital gains and qualified dividends,
and expanded tax credits. This report examines the Bush tax cuts within the context of the current
and long-term economic environment.
The U.S. economy entered into a recession in December 2007. Between the fourth quarter of
2007 and the second quarter of 2009, the economy shrank with real gross domestic product
(GDP) falling by 4.1%. The unemployment rate increased from 4.9% in December 2007 to 10.1%
by October 2009, and is currently still over 9%. As a result of reduced economic activity and
government efforts to stimulate the economy, the federal budget deficit increased from 1.2% of
GDP in FY2007 to 9.9% of GDP in FY2009. Most economic forecasts suggest the economic
outlook over the next few months is not bright and will likely be characterized by high
unemployment and sluggish economic growth. The long-term fiscal situation is unsustainable.
There are several options that Congress can consider regarding the Bush tax cuts, and each of the
options strikes a different balance between fostering economic growth and restoring fiscal
sustainability. Allowing the Bush tax cuts to expire as scheduled will somewhat improve the
fiscal condition, but could stifle the economic recovery. At the other extreme, permanently
extending all of the Bush tax cuts would not undercut the economic recovery, but would worsen
the longer-term fiscal outlook and possibly signal a lack of progress in dealing with the long-term
fiscal situation. The Obama Administration has proposed allowing the Bush tax cuts to expire for
high income taxpayers and permanently extending the tax cuts for middle class taxpayers. The
House passed the Middle Class Tax Relief Act of 2010 (H.R. 4853) on December 2, 2010, which
would permanently extended the Bush tax cuts for middle-class taxpayers (single taxpayers with
income under $200,000 and married taxpayers with income under $250,000). Compared to
permanently extending all of the Bush tax cuts, this proposal is estimated to increase tax revenues
by $252 billion over 5 years and by $678 billion over 10 years, but still leaves federal debt on an
unsustainable path. The Obama Administration and the congressional Republican leadership
recently agreed to a tax and spending plan that includes a 2-year extension of the Bush tax cuts. A
2-year extension of the Bush tax cuts could cost over $300 billion and increase debt service costs
by $121 billion over 10 years. A temporary extension of the Bush tax cuts, however, could
provide time for Congress to consider tax reform and also provide a deadline to complete
deliberations. Furthermore, 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.
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The Bush Tax Cuts and the Economy
Contents
Economic and Budgetary Environment ....................................................................................... 1
The Economy........................................................................................................................ 1
The Federal Budget ............................................................................................................... 4
The Bush Tax Cuts...................................................................................................................... 6
Revenue Loss from the Bush Tax Cut Provisions................................................................... 8
Distributional Effects of the Bush Tax Cut Provisions.......................................................... 10
Options Regarding the Bush Tax Cuts ....................................................................................... 12
Obama Administration Proposal .......................................................................................... 12
Temporary Extension of Some or All Bush Tax Cut Provisions............................................ 14
Figures
Figure 1. Employment Levels During Selected Recessions .......................................................... 2
Figure 2. Monthly Unemployment Rate and Long-Term Unemployment Rate, 1948-2010.......... 3
Figure 3. Deficits as a Percentage of GDP, 2007-09 Recession Compared to Prior
Recessions ............................................................................................................................... 5
Figure 4. Debt Held by the Public as a Percentage of GDP, 1790-2009 ........................................ 6
Figure 5. Federal Deficits as a Percentage of GDP, Two Scenarios............................................... 7
Figure 6. Debt Held by the Public as a Percentage of GDP, Two Scenarios .................................. 8
Figure A-1. Lorenz Curves of Bush Tax Cut Provisions, 2012 ................................................... 17
Tables
Table 1. Revenue Estimates of Bush Tax Cut Provisions: Effect on Deficit 2011-2020................. 9
Table 2. Percentage Change in After-Tax Income Due to Bush Tax Cut Provisions by
Income Category.................................................................................................................... 11
Table 3. 10-Year Revenue Gain from Expiration of Bush Tax Cuts for High-Income
Taxpayers .............................................................................................................................. 13
Table 4. Revenue Estimates of a One-Year Extension of the Bush Tax Cuts: Effects on
Deficit.................................................................................................................................... 15
Table 5. Revenue Estimates of a Two-Year Extension of the Bush Tax Cuts: Effects on
Deficit.................................................................................................................................... 15
Appendixes
Appendix. The Suits Index ........................................................................................................ 16
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The Bush Tax Cuts and the Economy
Contacts
Author Contact Information ...................................................................................................... 17
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The Bush Tax Cuts and the Economy
series of tax cuts were enacted early in the George W. Bush Administration by the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16)
A and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27).1
These tax cuts, which are collectively known as the Bush tax cuts, are scheduled to expire at the
end of 2010. Beginning in 2011, many of the individual income tax parameters (such as tax rates)
will revert back to 2000 levels.
The pending expiration of the Bush tax cuts has generated a great deal of attention as reflected by
editorials and opinion pieces in national newspapers, and Congressional hearings. The current
proposals regarding the Bush tax cuts are generally not about whether or not to let the tax cuts
expire as scheduled, but rather about which tax cuts to extend and for how long. This report
examines the Bush tax cuts within the context of the current and long-term economic and
budgetary environment.
The major tax provisions in EGTRRA and JGTRRA that are part of the current debate over the
Bush tax cuts are the reduced individual income tax rates, the reduction of the marriage penalty
(and increase in the marriage bonus), the repeal of the personal exemption phaseout and the
limitation on itemized deductions, the reduced tax rates on long-term capital gains and qualified
dividends, and expanded tax credits. Other provisions that were included in EGTRRA and
JGTRRA, such as the estate tax, are not considered in this study.
Economic and Budgetary Environment
The U.S. economy entered into a recession in December 2007.2 Between the fourth quarter of
2007 and the second quarter of 2009, the economy shrank with real gross domestic product
(GDP) falling by 4.1%. The unemployment rate increased from 4.9% in December 2007 to 10.1%
by October 2009, and still is over 9%. As a result of reduced economic activity and government
efforts to stimulate the economy, the federal budget deficit increased from 1.2% of GDP in
FY2007 to 9.9% of GDP in FY2009.
The Economy
The recession beginning in December 2007 is the most severe recession since the Great
Depression and has been referred to as the Great Recession. The economy started to grow after
mid-2009. One measure that has tracked economic activity fairly well in the past is the Federal
Reserve Board’s industrial production index.3 The industrial production index started to turn up
after May 2009, and NBER’s Business Cycle Dating Committee has determined the date of the
end of the recession to be June 2009.4
1 See CRS Report R41111, Expiration and Extension of the Individual Income Tax Cuts First Enacted in 2001 and
2003: Background and Analysis, by James M. Bickley, for more details.
2 Business cycle peaks (start of a recession) and troughs (end of a recession) are determined by the Business Cycle
Dating Committee of the National Bureau of Economic Research (NBER).
3 This measure is one of the economic indicators used by the Business Cycle Dating Committee in its determination of
the economy’s turning points.
4 The latest communication from the Business Cycle Dating Committee was issued September 20, 2010, and is
available at http://www.nber.org/cycles/sept2010.html.
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The economic recovery, however, remains fragile and the labor market has not recovered. Figure
1 shows employment for the first month of the recession and the next 30 months. The trend in
employment (as a percentage of employment in the first month of the recession) is compared to
two other deep and prolonged recessions of similar duration (assuming the 2007-2009 recession
ended in July 2009). For these latter two recessions, the employment level began increasing
within a month or two after the end of the recession (the end of the recessions is denoted by the
vertical line in the figure). In the 2007-09 recession, employment did not hit bottom until about
25 months after the start of the recession (in December 2009). Furthermore, the employment level
has fallen since May 2010, and by July 2010 stood at 94% of the December 2007 level.
Figure 1. Employment Levels During Selected Recessions
106
104
102
1973-75 Recession
100
x
nde
I
98
nt
e
m
1981-82 Recession
loy
96
p
2007-09 Recession
m
E
94
92
90
88
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Months After Start of Recession
Source: CRS analysis of Bureau of Labor Statistics data.
Weakness in the labor market is further indicated by the proportion of the labor force that has
been unemployed for at least six months (the long-term unemployed). Figure 2 displays the
monthly unemployment and long-term unemployment rates since 1948. The long-term
unemployment rate has generally tracked the unemployment rate over the business cycle. Over a
business cycle, the long-term unemployment rate is at its lowest point at or near the beginning of
a recession and then reaches a peak a few months after the end of the recession (typically within
six months). Like the unemployment rate, the long-term unemployment rate is a lagging
indicator—the labor market does not begin to recover from the recession until some time after the
official end of the recession. After the 1990-91 and 2001 recessions, however, the long-term
unemployment rate did not reach its peak until 15 and 19 months, respectively, after the recession
ended. The long-term unemployment rate is currently higher than at any time over the past 62
years—in July 2010, 4.3% of the labor force or about 45% of the unemployed had been out of
work for six months or more.
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Figure 2. Monthly Unemployment Rate and
Long-Term Unemployment Rate, 1948-2010
12%
10%
8%
6%
4%
2%
0%
Jan-48
Jan-52
Jan-56
Jan-60
Jan-64
Jan-68
Jan-72
Jan-76
Jan-80
Jan-84
Jan-88
Jan-92
Jan-96
Jan-00
Jan-04
Jan-08
Recessions
Unemployment Rate
Long-term Unemployment Rate
Source: CRS analysis of Bureau of Labor Statistics data.
In early August 2010, the Federal Reserve Board reported that “the pace of recovery in output and
employment has slowed in recent months.”5 Robert Shiller of Yale University reportedly put the
chances of a double-dip recession at more than 50-50 because of the high unemployment.6 In
addition to the labor market, the housing market continues to be weak. In its latest release, the
National Association of Realtors reports that existing home sales declined by 27.2% between June
and July 2010. Mark Zandi of Moody’s Analyticals has reportedly said the housing market is in a
double-dip recession.7
The economic outlook over the next few months is not bright and will likely be characterized by
high unemployment and sluggish economic growth. For example, the Blue Chip consensus
forecast has the unemployment rate staying above 9% until the fourth quarter of 2011.8 And
Carmen Reinhart and Vincent Reinhart show that real per capita GDP growth rates tend to be low
during the decade following a severe financial crisis and synchronous world-wide shocks.9
5 Board of Governors of the Federal Reserve System, Press Release, August 10, 2010 available at
http://www.federalreserve.gov/newsevents/press/monetary/20100810a.htm.
6 Cynthia Lin, “Shiller sees double-dip recession if jobs aren’t created,” Marketwatch, August 11, 2010 available at
http://www.marketwatch.com/story/shiller-sees-double-dip-if-jobs-arent-created-2010-8-11.
7 Michelle Lodge, “Housing in ‘Double-Dip’: Economist Zandi,” CNBC, August 23, 2010, available at
http://www.cnbc.com/38820610.
8 Blue Chip Economic Indicators, vol. 35, no. 8 (August 10, 2010).
9 Carmen M. Reinhart and Vincent R. Reinhart, “After the Fall,” presented at the Federal Reserve Bank of Kansas City
(continued...)
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The Federal Budget
Before the Bush tax cuts were enacted the Congressional Budget Office (CBO) projected
gradually rising federal budget surpluses—from 2.7% of GDP in 2001 to 5.3% of GDP by 2011.10
Within a few years, CBO was projecting budget deficits. The Bush tax cuts, with a $1 trillion 10-
year price tag, contributed to this shift from budget surpluses to deficits. Other major contributing
factors included the 2001 recession, the increase in defense spending for the wars in Iraq and
Afghanistan, and the Medicare prescription drug benefit (enacted in the Medicare Prescription
Drug, Improvement, and Moderation Act of 2003; P.L. 108-173). By the time the 2007-2009
recession started, CBO was projecting deficits between FY2008 and FY2011 equivalent to over
1% of GDP (with budget surpluses after 2011).11
Nonetheless, federal budget conditions before the 2007-2009 recession were not much different
from the conditions before previous recessions. Figure 3 shows the budget deficit as a percentage
of GDP for three years—the fiscal year before the start of the recession, the fiscal year in which
the recession started, and the next fiscal year. The 2007-2009 recession is compared to the
average of the prior six recessions. In the year before the Great Recession (2006), the budget
deficit was 1.2% of GDP compared to 1.6% of GDP, on average, for the previous six recessions.
The situation, however, is very different for the next two fiscal years. The federal deficit
increased to 3.2% of GDP in the year the 2007-2009 recession started (compared to 1.4% of GDP
for previous recessions) and then to almost 10% of GDP in the next year (compared to 2.2% of
GDP in previous recessions). The dramatic increase in the federal deficit after 2007 is due to the
recession and the federal government’s efforts to promote economic recovery, such as the
Economic Stimulus Act of 2008 (P.L. 110-185) and the American Recovery and Reinvestment
Act of 2009 (P.L. 111-5).
(...continued)
Jackson Hole Symposium, Jackson, WY, August 26-28, 2010.
10 CBO, The Budget and Economic Outlook: Fiscal Years 2002-2011, January 2001.
11 CBO, The Budget and Economic Outlook: Fiscal Years 2008 to 2018, January 2008.
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Figure 3. Deficits as a Percentage of GDP,
2007-09 Recession Compared to Prior Recessions
12%
10%
8%
GDP
ge of
6%
ta
n
Perce
4%
2%
0%
Year Before Recession
Year Recession Started
Year After Recession Started
Past 6 Recessions
07-09 Recession
Source: CRS calculations based on OMB data.
The deficit is just one facet of the fiscal condition. Another is federal debt held by the public.
Figure 4 displays federal debt held by the public as a percentage of GDP from 1790 to 2009.
Federal debt in 2009 was equal to 53% of GDP—a level higher than at any time in U.S. history
except for World War II. Between 2007 and 2009, federal debt increased by almost 17% of GDP.
Most large increases in debt have been due to wars (the Civil War, World War I, and World War
II) and to the Great Depression, but debt also increased dramatically between 1981 and 1994—by
23%—when taxes were reduced and defense spending increased.
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The Bush Tax Cuts and the Economy
Figure 4. Debt Held by the Public as a Percentage of GDP, 1790-2009
120
World War II
100
80
P
D
G
of
53%
ge
60
ta
n
e
rc
Great Depression
e
P
40
World War I
Civil War
20
1929
1860
1916
0
1790
1820
1850
1880
1910
1940
1970
2000
Year
Source: CBO and OMB.
The Bush Tax Cuts
Several tax provisions were included in EGTRRA and JGTRRA. However, only a few are the
focus of debate, which are
• the 10%, 25%, and 28% tax rates: the 10% tax rate was introduced and the 28%
and 31% tax rates were reduced to 25% and 28%, respectively;
• the 33% and 35% tax rates: the 36% and 39.6% tax rates were reduced to 33%
and 35%, respectively;
• the reduced marriage penalty: expanded the 15% tax bracket and increased the
standard deduction for couples;
• the repeal of the personal exemption phaseout (PEP) and the limitation on
itemized deduction (Pease): both PEP and Pease were gradually phased out and
eliminated in 2010;
• the reduced long-term capital gains tax rate: tax rate was reduced from 10% and
20% to 0% and 15%;
• the reduced tax rate on qualified dividends: qualified dividends are taxed at long-
term capital gains tax rates rather than at the same tax rates as ordinary income;
and
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The Bush Tax Cuts and the Economy
• the expanded tax credits: the child tax credit, the earned income tax credit
(EITC), and education incentives were expanded.
The Bush tax cuts are scheduled to expire at the end of 2010, and the tax parameters revert back
to their 2000 values (the current law baseline). Some policymakers have proposed to permanently
extend the Bush tax cuts (for example, the Tax Hike Prevention Act of 2010 (S. 3773) introduced
by Senator Mitch McConnell). CBO estimates that permanently extending the tax provisions of
EGTRRA and JGTRRA would increase the deficit by $1,215 billion over five years and by
$3,312 billion over 10 years.12
Figure 5 displays the trend in federal deficits as a percentage of GDP from 1980 to 2020. Under
current law the federal deficit is projected to decline from 9.2% of GDP in 2010 to 3% of GDP by
2020. If all the Bush tax cuts are permanently extended (including the repeal of the estate tax) the
deficit is projected to be 5.1% of GDP in 2020 and on a clearly unsustainable path of increasing
deficits. Neither of the projections take into consideration likely annual changes to the alternative
minimum tax (AMT), with a projected 10-year cost of about $1,500 billion.13
Figure 5. Federal Deficits as a Percentage of GDP, Two Scenarios
4
2
0
Current Law
-2
GDP
ge of
-4
ta
n
-6
Perce
Extension of Tax
Cuts
-8
-10
-12
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
Fiscal Year
Source: CRS analysis of CBO and JCT estimates.
12 CBO, The Budget and Economic Outlook: An Update, August 2010, Table 1.7. The increase in debt service is
included in these estimates.
13 The Tax Policy Center estimates that 28.5 million taxpayers would be subject to the AMT without the annual AMT
fix. In 2009, 4 million taxpayers were subject to the AMT. See Tax Policy Center, Aggregate AMT Projections, 2009-
2020, Table T10-0106, May 3, 2010.
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Figure 6 shows the trend in debt held by the public as a percentage of GDP. Under both current
law and the permanent extension of the Bush tax cuts, debt as a percentage of GDP is much
higher in 2020 than in 2009. Furthermore, under both scenarios debt is trending upward relative
to GDP after 2014.
Figure 6. Debt Held by the Public as a Percentage of GDP, Two Scenarios
80
Extension of Tax
Cuts
70
Current Law
60
50
GDP
ge of 40
a
rcent 30
e
P
20
10
0
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Fiscal Year
Source: CRS analysis of CBO and JCT estimates.
Revenue Loss from the Bush Tax Cut Provisions
The estimated budgetary costs of permanently extending the provisions of the Bush tax cuts are
reported in Table 1. Over five years, extending the provisions are estimated to reduce tax
revenues by $869 billion. The 10-year revenue loss is estimated to be $2,023 billion. Debt service
costs associated with permanently extending the Bush tax cuts are also reported in Table 1. Over
the 10-year budget window, debt service costs are estimated to be $450 billion. Furthermore, the
alternative minimum tax (AMT), which is likely to be indexed to inflation, interacts with the
extension of the Bush tax cuts. The last row of Table 1 reports the combined costs of indexing the
AMT, extending the Bush tax cuts, and associated debt service, which is estimated to be $3,812
billion over 10 years.
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Table 1. Revenue Estimates of Bush Tax Cut Provisions: Effect on Deficit 2011-2020
(millions of dollars)
Provision 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011-15
2011-20
Middle-class
-59,881 -133,650 -138,354 -141,678 -143,725 -144,337 -145,231 -145,529 -145,752 -146,294 -617,288 -1,344,431
tax cuts
High-income
-33,514 -40,879 -49,729 -59,777 -67,856 -73,750 -79,572 -85,351 -91,059 -96,805 -251,755 -678,292
tax cuts
Total
-93,395 -174,529 -188,083 -201,455 -211,581 -218,087 -224,803 -230,880 -236,811 -243,099 -869,043 -2,022,723
Debt
service -827 -3,241 -10,207 -21,340 -34,120 -48,256 -62,858 -76,497 -89,246 -103,093 -69,734 -449,683
Total Bush tax
-178,772 -248,784 -280,682 -320,793 -359,084 -397,978 -441,089 -483,605 -527,583 -574,019 -1,388,114 -3,812,389
cuts and AMT
indexed for
inflation with
debt service
Source: Department of Treasury, Joint Committee on Taxation, Congressional Budget Office, and CRS calculations.
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The Bush Tax Cuts and the Economy
Distributional Effects of the Bush Tax Cut Provisions
The various provisions making up the Bush tax cuts have different distributional impacts. Table 2
reports what the percentage change in after-tax income for each the tax provision would be in
2012 if it were permanently extended.14 The baseline is current law in which the Bush tax cuts are
allowed to expire as scheduled at the end of 2010. This estimate provides information on who
benefits from each provision and by how much. The Suits index is also calculated and reported
for each provision. The Suits index is a measure of the progressivity of tax benefits and varies
between -1 (completely regressive) and +1 (completely progressive).15 The Suits index is negative
(and tax benefits are regressively distributed) if the benefits from the provision are predominately
received by taxpayers in the upper part of the income distribution. It is positive if the benefits
predominately go to lower income taxpayers. It is zero if the benefits are proportionately
distributed throughout the income distribution.
The second and third columns in Table 2 report the distributional effects of extending the reduced
tax rate provisions. The two columns split the tax rate reductions into those targeting lower and
middle income taxpayers and those targeting high income taxpayers. Extending the 10%, 25%,
and 28% tax rates benefits taxpayers throughout the income distribution (see column 2). The
Suits index is slightly positive (0.0895) but is much closer to zero than to one—the benefits are
slightly progressive but close to being proportional. The benefits of extending the 33% and 35%
tax rates are entirely confined to the richest 5% of taxpayers (see column 3) and the richest 1%
would see their after-tax income increase by about 2% (or about $21,500). The Suits index is
−0.7979, suggesting that the benefits are highly regressive.
Extending the repeal of PEP and Pease would also benefit high income taxpayers (the richest
5%)—the benefits are very regressively distributed (the Suits index is −0.7325). The reduced tax
rates on capital gains and dividends (see columns 5 and 6) primarily benefit upper income
taxpayers and are regressively distributed. The reduced rates on capital gains benefits the upper
60% of the income distribution but the richest 1% see the largest increase in after-tax income
while the reduced dividends tax rates benefits the upper 20%. In both cases, the Suits index is
negative.
Extending the reduction in the marriage penalty would benefit married taxpayers throughout the
income distribution. The Suits index is 0.1048 suggesting that the benefits are slightly
progressive, but close to being proportional. The extension of the expanded tax credits primarily
benefits taxpayers below the 80th percentile in the income distribution. The Suits index (0.6733)
shows that the benefits are progressively distributed.
14 The estimates were prepared by the Urban-Brookings Tax Policy Center.
15 See the Appendix for more details on the Suits index.
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Table 2. Percentage Change in After-Tax Income Due to Bush Tax Cut Provisions by Income Category
Reduced Tax
Reduced Tax
Reduced
Reduced
Reduced
Average
Income
Rates: 10%,
Rates: 33%,
Repeal
Capital Gains
Dividends Tax
Marriage
Expanded Tax
After-Tax
Category
25%, 28%
35%
PEP/Pease
Tax Rate
Rate
Penalty
Credits
Income
Poorest Quintile
0.1
0.0
0.0
0.0
0.0
0.2
0.9
$10,702
Quintile 2
1.0
0.0
0.0
0.0
0.0
0.3
1.3
$23,359
Quintile 3
1.3
0.0
0.0
0.1
0.0
0.1
0.7
$38,362
Quintile 4
1.3
0.0
0.0
0.1
0.0
0.4
0.4
$61,176
80-90 percentile
1.6
0.0
0.0
0.1
0.1
0.7
0.1
$88,999
90-95 percentile
1.8
0.0
0.0
0.2
0.1
0.5
0.0
$124,146
95-99 percentile
1.5
0.1
0.3
0.4
0.2
0.3
0.0
$213,506
Richest 1%
0.3
1.9
0.9
1.3
0.8
0.1
0.0
$1,071,100
Al 1.2
0.3
0.2
0.3
0.2
0.3
0.3
$58,277
Suits index
0.0895
-0.7979
-0.7325
-0.5768
-0.6641
0.1048
0.6733
Source: CRS analysis of Tax Policy Center estimates.
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The Bush Tax Cuts and the Economy
With the benefits of the different tax provisions accruing to taxpayers in different parts of the
income distribution, decisions regarding the Bush tax cut provisions will affect income inequality.
In a recent article, Thomas Hungerford examined the impacts of various tax provisions (including
selected provisions of the Bush tax cuts) on income inequality.16 The results show that the
reduction in the tax rates increased income inequality as did the reduction in the capital gains and
dividends tax rate, and the repeal of PEP and Pease. Both the child tax credit and earned income
tax credit (EITC) reduce income inequality.
Options Regarding the Bush Tax Cuts
There are several options that Congress can consider regarding the Bush tax cuts. The two
extreme options have been discussed along the following lines. Allowing the Bush tax cuts to
expire as scheduled will somewhat improve the fiscal condition, but could stifle the economic
recovery. At the other extreme, permanently extending all of the Bush tax cuts would not
undercut the economic recovery, but would worsen the longer-term fiscal outlook and possibly
signal a lack of progress in dealing with the long-term fiscal situation. In either case, the U.S. is
facing increasing budget deficits and federal debt levels. A recent study by Alan Auerbach and
William Gale projects that tax revenue would have to be permanently increased by 4.6% of GDP
just to keep the debt-to-GDP ratio at the current level over the next 75 years under the current law
scenario (i.e., allow the Bush tax cuts to expire).17 They refer to this as a fiscal gap of 4.6%.18 If
the Bush tax cuts were permanently extended the estimated fiscal gap rises to 7.2%. They project
that by 2085, debt as a percentage of GDP would approach 600% under the current law scenario
and 900% if the Bush tax cuts are extended—extraordinary levels that are unprecedented for the
U.S. (see Figure 4).
Obama Administration Proposal
The Obama Administration has proposed to allow the Bush tax cuts expire for high income
taxpayers (single taxpayers with income over $200,000 and married taxpayers with income over
$250,000—the richest 2% of taxpayers) and permanently extend the tax cuts for other taxpayers
(the middle income tax cuts). The House passed the Middle Class Tax Relief Act of 2010 (H.R.
4853) on December 2, 2010, which would permanently extended the Bush tax cuts for middle-
class taxpayers (single taxpayers with income under $200,000 and married taxpayers with income
under $250,000). The specific proposals are to reinstate the 39.6% tax rate, reinstate the 36% tax
rate for high income taxpayers, reinstate PEP and Pease for high income taxpayers, and increase
the long-term capital gains and qualified dividend tax rate to 20% for high income taxpayers.
Compared to permanently extending all of the Bush tax cuts, this proposal is projected to increase
tax revenues by $252 billion over 5 years and by $678 billion over 10 years (see Table 3).19 The
16 Thomas L. Hungerford, “The Redistributive Effect of Selected Federal Transfer and Tax Provisions,” Public
Finance Review, vol. 38, no. 4 (July 2010), pp. 450-472.
17 Alan J. Auerbach and William G. Gale, “Deja Vu All Over Again: On the Dismal Prospects for the Federal Budget,”
National Tax Journal, vol. 63, no. 3 (September 2010), pp. 543-560.
18 Auerbach and Gale define the fiscal gap as the size as a percentage of GDP of the immediate and permanent tax
increase or reduction in non-interest federal spending that would keep the long-run debt-to-GDP ratio at the current
level.
19 Department of Treasury, General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals,
February 2010, available at http://www.treas.gov/offices/tax-policy/library/greenbk10.pdf.
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10-year reduction in estimated debt service is $140 billion. Auerbach and Gale, however, estimate
that the fiscal gap under the Obama Administration proposal is 6.4%, and still leaves federal debt
on an unsustainable path, which would approach 750% of GDP by 2085.
Table 3. 10-Year Revenue Gain from Expiration of Bush Tax Cuts
for High-Income Taxpayers
(millions of dollars)
High-income Taxpayer
Income Thresholds
Revenue Gain
Debt Service Reduction
Single: $200,000/joint: $250,000
678,292
140,032
Single and joint: $350,000
567,730
117,207
Single and joint: $500,000
487,692
100,683
Single and joint: $1,000,000
362,886
74,917
Source: CRS calculations.
Notes: Baseline is the permanent extension of the Bush tax cuts provisions; interactions with AMT are not
included in estimates.
The Obama Administration argues that the middle class tax cuts are necessary to keep the
economic recovery on track by preventing a sharp fall in the disposable income of consumers.20
They further argue that allowing the tax cuts expire for high income taxpayers will contribute to
restoring fiscal responsibility. Senate Finance Committee Chairman Max Baucus has expressed
support for proposals broadly consistent with the Obama Administration proposal.21
Some policy makers and analysts have proposed alternative income thresholds to define high-
income taxpayers. The thresholds that have frequently been discussed are $350,000; $500,000;
and $1,000,000 for both single and joint taxpayers. The revenue gain (and associated debt service
reductions) from allowing the Bush tax cuts to expire for high-income taxpayers with income
over the three alternative thresholds is reported in Table 3. The estimated 10-year revenue gain
under the $350,000 income threshold is $568 billion—about 84% of the revenue gain under the
Obama Administration proposal. The estimated revenue gain falls as the income threshold rises so
that a $1,000,000 income threshold to define high-income taxpayers is estimated to raise $363
billion over 10 years—about 53% of the revenue gain under the Obama Administration proposal.
The President established the National Commission on Fiscal Responsibility and Reform by
executive order on February 18, 2010. The commission is tasked with looking for policies,
including tax policies, to improve the medium-term fiscal situation and achieve long-term fiscal
sustainability. The commission’s report is due in December 2010. Given the long-term fiscal
condition and a recognition that tax policy is an important tool to be used, it is unlikely that the
tax code and the middle class tax cuts will remain unchanged for long.
20 See Timothy Geithner, Remarks as Prepared for Delivery at Center for American Progress, August 4, 2010, TG-
814.
21 U.S. Senate, Committee on Finance, Baucus Examines Options for Extending Middle-Class Tax Cuts, News Release,
July 14, 2010.
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Temporary Extension of Some or All Bush Tax Cut Provisions
Some have proposed temporarily extending some or all of the Bush tax cuts. Those wanting to
extend all of the Bush tax cut provisions argue that raising taxes during a weak recovery could
reduce economic growth and possibly push the economy back into recession. Mark Zandi and
some Democrats have reportedly advocated permanently extending the middle class tax cuts and
temporarily extending the tax cuts targeted to high income taxpayers.22 The Obama
Administration and the congressional Republican leadership agreed to a tax and spending plan on
December 6, 2010, that includes a 2-year extension of the Bush tax cuts.23
Others have advocated temporarily extending the middle class tax cuts and allowing the tax cuts
targeting high income taxpayers to expire as scheduled at the end of 2010.24 It can be argued that
permanently extending all of the Bush tax cuts could make future tax reforms to deal with
unsustainable deficits and debt trends more difficult. A temporary extension could provide time
for Congress to consider tax reform and also provide a deadline to complete deliberations.
Furthermore, allowing the high income tax cuts to expire as scheduled could help reduce budget
deficits in the short-term without stifling the economic recovery.25 Research has shown that tax
cuts directed to high income taxpayers have a small stimulative effect because they tend to save
any additional income.26 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.27 Some argue this policy could allow Congress to
make progress toward restoring fiscal sustainability.
The estimated costs of a 1-year extension of the Bush tax cuts are reported in Table 4. The costs
of extending the tax cuts for a single tax year will affect revenues in two fiscal years (FY2011,
which started on October 1, 2010, and FY2012, which starts on October 1, 2011). Also included
in the table is the 10-year cost. A 1-year extension of the middle-class tax cuts would cost $93.3
billion over 10 years. Extending the tax cuts for high-income taxpayers for a single year is
estimated to cost $43.7 billion. In total, a 1-year extension of the Bush tax cuts is estimated to
cost $137.0 billion in forgone tax revenue and $54.2 billion in additional debt service costs. The
last row of Table 4 shows the cost of a 1-year extension of the Bush tax cuts for all taxpayers,
indexing the AMT to inflation and the interaction with the Bush tax cuts, and associated debt
service costs. The total 10-year cost is estimated to be $332.5 billion.
22 Lori Montgomery, “Shaky economy alters tax-cut dynamic in Congress,” Washington Post, August 27, 2010, p. A2.
23 The plan also includes an extension of unemployment benefits, an AMT patch, estate tax changes, among other
provisions.
24 See, for example, Leonard E. Burman, Statement before the Senate Committee on Finance, hearings on The Future
of Individual Tax Rates: Effects on Economic Growth and Distribution, July 14, 2010.
25 Tax cuts to the wealthy tend to be saved rather than spent and have little impact on short-term economic growth. See
CRS Report R40104, Economic Stimulus: Issues and Policies, by Jane G. Gravelle, Thomas L. Hungerford, and Marc
Labonte.
26 See CRS Report R40104, Economic Stimulus: Issues and Policies, by Jane G. Gravelle, Thomas L. Hungerford, and
Marc Labonte.
27 See CRS Report R41392, Small Business and the Expiration of the 2001 Tax Rate Reductions: Economic Issues, by
Jane G. Gravelle.
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Table 4. Revenue Estimates of a One-Year Extension of the Bush Tax Cuts:
Effects on Deficit
(billions of dollars)
2011 2012
2011-20
Middle-class
taxpayers
-59.9 -33.4 -93.3
High-income
taxpayers
-33.5 -10.2 -43.7
Al taxpayers
-93.4
-43.6
-137.0
Debt service
-0.8
-2.1
-54.2
Total Bush tax cuts,
-178.8 -64.6 -332.5
AMT indexed for
inflation, and debt
service
Source: CRS calculations based on information in Table 1.
Note: High-income taxpayers are single taxpayers with income over $200,000 and married taxpayers with
income over $250,000.
Table 5 shows the estimated costs of a 2-year extension of the Bush tax cuts. The 10-year cost of
just the tax cuts for all taxpayers is $314.9 billion. The associated debt service costs, however,
would add $121.4 billion to the cost over 10 years. Finally, the total 10-year cost of a 2-year
extension of the Bush tax cuts, indexing the AMT to inflation, and associated debt service costs is
estimated to be $675.2 billion.
Table 5. Revenue Estimates of a Two-Year Extension of the Bush Tax Cuts:
Effects on Deficit
(billions of dollars)
2011 2012 2013
2011-20
Middle-class
-59.9 -133.7 -34.6 -228.1
taxpayers
High-income
-33.5 -40.9 -12.4 -86.8
taxpayers
Al taxpayers
-93.4
-174.5
-47.0
-314.9
Debt
service
-0.8 -3.2 -8.2 -121.4
Total Bush tax
-178.8 -248.8 -79.1 -675.2
cuts, AMT indexed
for inflation, and
debt service
Source: CRS calculations based on information in Table 1.
Note: High-income taxpayers are single taxpayers with income over $200,000 and married taxpayers with
income over $250,000.
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The Bush Tax Cuts and the Economy
Appendix. The Suits Index
The progressivity measure used is a modified Suits index. The Suits index was originally
developed to measure the progressivity of the tax burden.28 Since benefits from tax provisions are
considered, the modified Suits index is the negative of the original Suits index.
The index is based on the Lorenz curve. Figure A-1 displays the Lorenz curves for the seven tax
provisions making up the Bush tax cuts that are considered in this study. The horizontal axis is the
accumulated share of income when tax units are ranked by income from lowest to highest. The
vertical axis is the accumulated share of tax benefits from the tax provisions. The diagonal line is
the Lorenz curve for a proportionally distributed tax benefit. A progressive benefit will have its
Lorenz curve above the diagonal line (for example, see the Lorenz curve for expanded tax
credits). This means that tax units with lower incomes receive benefits that are a larger proportion
of their income than higher income tax units. Conversely, a regressive benefit (for example, the
repeal of PEP and Pease) will have a Lorenz curve below the diagonal line.
Let the area under the Lorenz curve be denoted as L—it is the area bounded from below by the
horizontal axis and from above by the Lorenz curve. Let the area under the diagonal line be
denoted as K. The Suits index, S, is therefore defined as:
L − K
S =
.
K
28 Daniel B. Suits, “Measurement of Tax Progressivity,” American Economic Review, vol. 67, no. 4 (September 1977),
pp. 747-752.
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The Bush Tax Cuts and the Economy
Figure A-1. Lorenz Curves of Bush Tax Cut Provisions, 2012
100
Expanded tax credits
90
Reduce marriage penalty
80
70
fit
e
n
Extend 10%, 25%, and 28% tax
e
brackets
60
ax B
Extend 33% and 35% tax
f T
rates
e o
ar
50
Sh
Reduced capital
d
gains tax rates
te
la
40
u
m
Reduced tax rate
u
c
on dividends
c
A
30
Repeal PEP and
Pease
20
10
0
0
10
20
30
40
50
60
70
80
90
100
Accumulated Share of Income
Source: CRS analysis of Tax Policy Center estimates.
Author Contact Information
Thomas L. Hungerford
Specialist in Public Finance
thungerford@crs.loc.gov, 7-6422
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