What are the Bush Tax Cuts
The Bush tax cuts are a series of temporary income tax relief measures enacted by President George W. Bush in 2001 and 2003. The tax cuts lowered federal income tax rates for everyone, decreased the marriage penalty, lowered capital gains taxes, lowered the tax rate on dividend income, increased the child tax credit, eliminated the phaseout on personal exemptions for higher-income taxpayers, eliminated the phaseout on itemized deductions, and eliminated the estate tax.
BREAKING DOWN Bush Tax Cuts
The Bush tax cuts were two changes to the tax codes that were made to provide tax relief to families in 2001 and to businesses in 2003. The first tax code change, formally known as the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, was an income tax relief measure authorized by President George W. Bush to stimulate the economy during the 2001 recession that followed from the dotcom burst. The tax cuts were initiated to provide families with more disposable income in the hopes that the additional funds will spur spending in the economy. However, many taxpayers saved the refunds, instead of spending it. Since the tax relief benefited taxpayers earning $200,000 or more, the extra tax savings from EGTRRA were usually invested since these taxpayers' annual incomes already provided enough disposable income to cover their regular expenditures. Some of the benefits of the EGTRRA tax cuts included:
- Lowering the maximum estate, gift, and generation-skipping transfer tax rate to 50% in 2002 from 55% in 2001, with an additional 1% reduction each year until 2007.
- Removal of the time limit on student loan interest deductions for tax purposes.
- Allowing non-qualified 401(a), tax-sheltered 403(b), and deferred compensation 457(b) plans to be rolled over to another non-qualified plans, qualified plans, or IRA.
- Increasing the age for Required Minimum Distributions (RMDs) and allowing employees over the age of 50 to make additional contributions over the normal limits to their retirement plans.
- For those in the 15% marginal tax bracket, reducing the capital gains tax to 8% from 10% on qualified gains from the sale of capital assets held for at least 5 years .
- Introducing a new tax bracket of 10%. The previously lower 15% tax bracket was indexed to the new 10% bracket. The tax brackets 28%, 31%, 36%, and 39.6% were reduced to 25%, 28%, 33%, and 35%, respectively.
- Increasing the per-child tax credit from $500 to $1,000.
The second change to the tax code was enacted in 2003 and called the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). JGTRRA was introduced to provide a series of tax cuts for businesses and to accelerate the tax changes passed in the 2001 EGTRRA. By putting more money in the pockets of businesses and investors, and encouraging investments in the stock markets, JGTRRA was initiated to add more steam to the economy’s recovery. The JGTRRA:
- Reduced tax on long-term capital gains from 8% and 10% to 5%, and from 20% to 15%. Taxpayers in the 10 to 15% tax brackets had the capital gains tax reduced to zero in 2008.
- Lowered taxes on qualified dividends – including bank dividends, real estate investment trusts (REITs), and income from non-foreign corporations – to the long-term capital gains levels from the regular income tax levels.
- Accelerated many of the tax provisions in EGTRRA which were supposed to be phased-in gradually. For example, with EGTRRA the new 10% marginal tax bracket was to expand to $7,000 and $14,000 in 2008 for single filers and married filing jointly, respectively. With JGTRRA, the expansion amounts were accelerated to take effect in 2003 instead of waiting till 2008.
- Increased the amount of income exempt from the Alternative Minimum Tax (AMT) in order to allow more taxpayers pay tax at the regular income tax rate instead of the higher minimum tax rates.
- Increased the maximum amount that taxpayers can deduct immediately from the cost of a tangible business property placed in service during the tax year from $25,000 to $100,000.
Expiration and Extension
The Bush tax cuts under EGTRRA and JGTRRA were slated to expire in 2010 and 2008, respectively. However, following the 2008 economic recession, the tax cuts were extended to 2012. In 2012, with the fiscal cliff looming over the economy, the cuts were made permanent when President Obama signed the American Taxpayer Relief Act of 2012 in which the Bush tax cuts for income less than $400,000 for single taxpayers ($450,000 for married couples) were retained.
Because the tax cuts were in place for so many years, they began to feel permanent rather than temporary, and taxpayers and politicians raised a major outcry as their expiration date approached. Those who wanted to let the tax cuts expire as scheduled argued that the government needed the extra tax revenue in the face of its massive budget deficits. Those who wanted to extend the Bush tax cuts or make them permanent argued that because taxes reduce economic growth and stifle entrepreneurship and incentives to work, effectively increasing taxes during a recession was a bad idea.
The Bush tax cuts coupled with the war spending on Iraq led to a budget deficit from the reduction in tax revenues received by the government. In fact, the budget deficit for fiscal year 2009 was $1.4 trillion, the largest deficit relative to the economy since the end of World War II.