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The Bush Tax Cuts: Didn’t they help the economy recover from the 2001 recession?

Casual commentary on economic policy is often based on the post hoc ergo propter hoc ("after this, therefore because of this") fallacy. In the case of the Bush tax cuts, it is argued that because an economic recovery followed the tax cuts, the tax cuts must have caused the recovery. In truth the economy recovered from the 2001 recession for a variety of reasons unrelated to the tax cuts, which were poorly designed to deliver a short-term economic stimulus.

  • Several factors contributed to the turnaround in economic growth following the 2001 recession. The Federal Reserve reduced interest rates to historic lows, spurring huge amounts of mortgage refinancing; this reduced homeowners’ monthly payments, which in turn increased consumer demand for other products. A period of economic and political uncertainty followed the terrorist attacks of September 11, 2001, but by 2003, when the major military campaign in Iraq had begun, at least some of that uncertainty had dissipated. Government spending also increased in these years, including for defense and homeland security. Meanwhile the technology cycle continued to turn: investment went from boom in the late 1990s to a drought in 2001 and 2002, but by 2003 firms were once again willing to invest. Compared with these factors, the Bush tax cuts of 2001, 2002, and 2003 had a small effect in stimulating the economy out of the recession of 2001 and the slow growth of 2002 and 2003.
 
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