Bush Administration Tax Policy: Summary and Outlook

Library / Publications

Recent Publications

Most-Requested

Browse All Publications:

by TPC series Issues & Option Briefs Discussion Papers Tax Facts Column Tax Break Column Economic Perspective

Advanced Search

by Topic:

by Author:

by Type:

by Date Range:
From last wks

tpc > library > publications

Bush Administration Tax Policy: Summary and Outlook

William G. Gale, Peter Orszag

Published: November 29, 2004 || Availability: PDF | Printer-Friendly Version

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).

I. Introduction

This is the eighth and final installment in a series that evaluates tax policy in the Bush administration, covering the years 2001 to 2004.¹ The article summarizes our principal findings, and discusses some of the key tax and fiscal issues facing the administration in its second term.

Tax policy was the central economic policy focus of the Bush administration from 2001 to 2004. Ultimately, no fewer than five significant tax acts were enacted, at least four of which were publicly and strongly advocated by the administration.² Those policies alone represent a major shift in the structure, incentives, revenues, and distributional effects of the American tax system. Additional changes proposed by the administration — to dramatically expand tax-preferred saving accounts and to make the existing tax cuts permanent — would move the system even farther in new directions.

A special difficulty in evaluating the tax legislation enacted over the past few years is the presence of several prominent ‘‘loose ends.’’ First, the 2001, 2002, and 2003 tax cuts are scheduled to expire by the end of 2010, but virtually no one expects those expirations to be fully implemented. Second, even before the tax cuts were enacted, the number of taxpayers facing the alternative minimum tax was projected to rise markedly over time. The tax cuts, however, have substantially exacerbated the problem, helping to create a situation that is widely regarded as unsustainable. Finally, neither the enacted legislation nor the administration itself describes which specific future tax increases or spending cuts will pay for the tax cuts, even though those tax increases or spending reductions are the only way to finance the tax cuts over the long term. While those ‘‘loose ends’’ may appear to be technical distractions, their resolution is central to any conclusions about the effects of tax policy in the Bush administration. For the most part, our analysis focuses on scenarios in which (a) the provisions of the 2001 and 2003 tax cuts, but not the 2002 tax cuts, are made permanent; and (b) the AMT is adjusted so that the number of taxpayers facing the AMT in any future year is the same as it would have been in that year had the Bush tax cuts never been enacted. We also examine the effects of alternative methods of financing the tax cuts.

We find that, by any reasonable measure, making the tax cuts permanent would be unaffordable. Likewise, by any reasonable measure, the tax cuts are regressive. When the requisite spending cuts or other tax increases needed to pay for the tax cuts are included, the net effect will be to transfer resources away from low-income households and toward high-income households. The result will make most households worse off, even if the tax cuts generate economic growth (which itself becomes increasingly less likely the longer the tax cuts are not offset by other policy changes, as discussed further below).

In general, policies that would otherwise be fiscally irresponsible and regressive could potentially be justified if they provided a strong boost to the economy. In the case of the tax cuts, however, other policies could have given the economy a larger short-term boost — while also being more fiscally responsible and more progressive. Also, making the tax cuts permanent is likely to have a zero or negative effect on long-term economic growth because the beneficial incentive effects from the tax cuts are modest and are offset by the adverse effect from failing to pay for the tax cuts immediately through spending reductions or other tax increases.

Two other ostensible goals of the recent tax cuts were to control government spending and pave the way for fundamental tax reform. But the tax cuts have not controlled government spending, and alternative policies could have been more effective in that regard at a much lower fiscal cost. Moreover, although the tax cuts share some superficial features of broad-based reforms, they are quite different in several more fundamental ways, and could actually make reform more difficult to achieve.

In its second term, the administration will have to address a number of challenging tax and fiscal problems, many of which are of its own making.

Notes from this section

1 The preceding papers are Gale and Orszag (2004a, b, c, d, e, f, g).

2 The tax cuts enacted in 2001, 2002, and 2003 are described in JCT (2001, 2002, and 2003) and analyzed in this series. Two tax changes were enacted in 2004 (see JCT 2004a, 2004b). The principal provisions of the first, the Working Families Tax Relief Act, extended a variety of provisions in the 2001 and 2003 tax cuts that were scheduled to expire before 2010; such extensions have virtually no effect on our analysis of the effects of making the 2001 and 2003 tax cuts permanent. The second, the American Jobs Creation Act, was largely unrelated to the 2001 and 2003 tax cuts, and therefore also has little implication for our analysis of those tax cuts. The administration strongly advocated the first four pieces of legislation, and did not oppose the last.

Note: This report is available in its entirety in the Portable Document Format (PDF).