By Byron Moore
The long battle over tax reform is finally coming to an end. President Barack Obama, victorious in re-election, may now dictate the terms by which Congress will fundamentally alter the federal tax landscape for the first time in over a decade. The contentious Bush tax cuts are finally set to expire. Or are they? The President has vowed to extinguish numerous provisions of the previous administration’s tax policy, yet much of the spirit of the tax cuts will remain. To examine the true fate of the Bush tax cuts, we must first know how we got to this juncture.
On December 13th, 2000, after a hard fought and contentious campaign, President George W. Bush told a weary nation that he would work with both parties to secure “Americans the broad, fair and fiscally responsible tax relief they deserve.” (http://www.guardian.co.uk/world/2000/dec/14/uselections2000.usa13). Nearly a year later, President Bush would sign the Economic Growth and Tax Relief Reconciliation Act of 2001 into law. This massive overhaul contained numerous provisions that affected various facets of federal tax law. Most notable were those designed to dramatically lower tax rates for all Americans by 2006. A follow-up piece of legislation, called the Jobs and Growth Tax Relief Reconciliation Act of 2003, accelerated the tax rate decrease. A study produced by Heritage Foundation found that the Bush tax cuts would increase personal savings, produce dramatic job growth and “effectively pay off the federal debt.” (http://origin.heritage.org/research/reports/2001/04/the-economic-impact-of-president-bushs-tax-relief-plan). This claim would later be refuted by the Congressional Research Service, which found that “changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth,” and that “[t]he reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth.” (http://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf).
These two pieces of legislation, collectively called the Bush tax cuts, contained a sunset provision set for January 1st, 2011. President Barack Obama’s election in 2008 seemed to call the future of these tax cuts into question. During the 2008 campaign, President Obama stated that he would end Bush-era tax cuts that favored wealthy Americans. He also promised to reverse cuts to capital gains tax, to extend the child tax credit, to expand the earned income tax credit, and to expand the child and dependent care credit. In a report issued in 2010, the Congressional Research Service (CRS) found that President Obama’s tax plan would “increase tax revenues by $252 billion over five years and by $678 billion over 10 years, but still leaves federal debt on an unsustainable path.” (http://fpc.state.gov/documents/organization/148790.pdf). Dire economic straits would eventually lead President Obama to sign a two year extension of the tax cuts by two years, through the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Through a series of convoluted deals, the Bush tax cuts had been granted clemency.
The most recent election has brought us back to the precipice. In sending President Obama back to the White House, Americans seemingly ended an intense four year tax policy standoff overnight. In my estimation, the current fate of the Bush tax cuts stems directly from bets placed by Congressional Republicans during President Obama’s first term. Congressional Republicans voted for deals that would effectively put tax reform in the spotlight right after the 2012 election. They had hoped that they would be able to handily defeat the President and make the Bush tax cuts permanent. President Obama and Congressional Democrats took that bet and won. Ostensibly, they have created a scenario where the Bush tax cuts as a whole cannot survive.
Days after the election, the President’s spokesman, Jay Carney, stated that “[t]he President would veto…any bill that extends the Bush-era tax cuts for the top two per cent of wage earners[.]” (http://economictimes.indiatimes.com/news/international-business/barack-obama-would-veto-any-extension-of-tax-cut-on-the-rich-jay-carney/articleshow/17165844.cms). President Obama followed with his own statement, saying that he would not “ask students and seniors and middle-class families to pay down the entire deficit while people like me, making over $250,000, aren’t asked to pay a dime more in taxes.” (http://www.whitehouse.gov/the-press-office/2012/11/09/remarks-president). On December 31st, 2012, the Bush Tax cuts will expire for all wage earners, returning the nation to the 2000 tax rates. Preferably, the President will make a deal by which the cuts survive for those in the middle class. Though the complete expiration of the Bush tax cuts would be seen as a loss for President Obama, it may be vastly preferable to a sweeping reauthorization of the cuts. Either way, the tyranny of the Bush tax cuts has ended.
In our current political climate, we will likely see the adoption of a grand bargain akin to the one recommended by the famed Simpson-Bowles Commission. Although this plan does, in a roundabout way, lead to new revenue, it does not come close to the revenue brought in under Clinton-era tax rates.. Ultimately, we must acknowledge that a great deal of the Bush tax cuts will remain in force. The question is whether the tax cuts will exist substantively or spiritually. Even if we were to see a dramatic departure from the Bush tax cuts, we would still see a systemic reticence to suggest further tax increases. Quite frankly, we’ve created a world where it is impossible to directly ask Americans to pay more in taxes to eliminate a debt they helped accrue. No matter what happens, these tax cuts have fundamentally altered the social contract.