By Danny Huizinga
Recently mentioned in the debates were the “Bush Tax Cuts,” a set of laws passed in 2001 and 2003 that lowered marginal tax rates for almost all taxpayers. Although the laws were set to expire in 2010, President Obama renewed them until 2012. Now the debate begins a third time as Democrats and Republicans again argue about the cuts’ proposed expiration.
Most Americans support a progressive tax system — a system where the wealthier pay a higher proportion of their income in taxes than the poor. The Bush tax cuts actually made the system more progressive.
Wait, how is that possible?
Didn’t Democrats argue that the wealthier receive a higher proportion of the Bush tax cuts?
How could the cuts also have made the system more progressive?
Well, in the words of Aristotle, “There are things which seem incredible to most men who have not studied mathematics.”
Let’s look at a hypothetical example to see how this is mathematically possible, relying on statistics from Deloitte and Touche’s analysis as cited by David Rosenbaum of the New York Times in 2001.
Imagine there are two families in America. According to Deloitte, in 2001, one that currently made $20,000 paid $990 (4.95 percent) in taxes. The other family made $1,000,000 and paid $306,842 (30.7 percent) in taxes. Thanks to the Bush tax cuts, the poor family saw their taxes reduced to $580, a reduction of $410 or 41 percent. The rich family saw their taxes reduced to $259,728, a change of $47,114 or 15 percent.
If we then added the two tax cut numbers together to find the total dollar amount cut, $580 + $47,114 = $47,694, we could see the statistic often cited by Democrats that the “rich received a higher percentage of the tax cut.”
In a large-scale society, there are obviously more than two families. However, not only did poor families see a higher tax cut than the rich in terms of percentage of income, but according to multiple calculations, the share of total taxes paid by the rich increased by a full percentage point, facts often cited by Republicans.
Both facts are true at the same time. Now the numbers are obviously going to be different today — but feel free to apply the same calculations.
My point is that, historically, the Bush tax cuts made the tax system more progressive. In addition, the law basically wiped away the tax bill for many low-income taxpayers.
Perhaps one of the biggest problems is that extending the cuts could cost trillions in lost revenues.
This is certainly distressing, considering the state of our national debt. The Obama administration has recently been arguing to extend the Bush tax cuts for all families making under $250,000 a year, while letting the other tax cuts expire. This “soak the rich” compromise may sound appealing to some, but it does not come close to eliminating the effect on the national debt. Additionally, raising taxes in this economy could cause even slower growth.
Peter J. Wallison, the Arthur F. Burns fellow in financial policy studies at the American Enterprise Institute, argues that tax cuts do not stimulate much growth without reducing regulation at the same time. He says:
“Tax cuts are powerful economic stimulants, as the Kennedy, Reagan, and Bush experiences show, but reducing regulation provides the space in which a private sector — incentivized by tax cuts — can find room to pursue the innovation and risk-taking that ultimately creates jobs.”
Danny Huizinga is a sophomore Baylor Business Fellow from Chicago. He manages the political blog at www.consideragain.com.