What Are the Bush Tax Cuts?
President George W. Bush issued a series of temporary income tax relief measures known as the Bush tax cuts between 2001 and 2003. They were made possible by two pieces of legislation: the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) (JGTRRA).
- President George W. Bush issued a variety of temporary income tax relief measures in 2001 and 2003, which were included in the Bush tax cuts.
- EGTRRA (2001) was enacted to stimulate the economy after the collapse of the dot-com boom.
- JGTRRA (2003) accelerated the tax adjustments approved in EGTRRA by providing a variety of tax breaks for enterprises.
- Both measures’ tax cuts were set to expire in 2010 and 2008, respectively, but were extended until 2012 owing to the 2008 recession.
Understanding the Bush Tax Cuts
The Bush tax cuts featured two different measures that were approved in 2001 and 2003 to offer tax relief to households and companies.
The legislation reduced federal income tax rates for everyone, eliminated the marriage penalty, reduced the capital gains tax and the dividend tax rate, and enhanced the child tax credit.
They also phased away personal exemptions for higher-income individuals as well as itemized deductions. The estate tax now has new exemptions.
The Bush Tax Cuts for Families
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 intended to stimulate the economy during the recession that followed the dot-com bubble burst—the sudden collapse of internet and digital technology stocks and the loss of trillions of dollars in investment dollars.
Some of the benefits of the EGTRRA tax cuts included:
- The maximum estate, gift, and generation-skipping transfer tax rate was reduced from 55% in 2001 to 50% in 2002, with a further 1% decrease each year through 2007.
- Removing the time restriction on tax-deductible student loan interest deductions.
- Allowing non-qualifying 401(a), tax-sheltered 403(b), and deferred compensation 457(b) plans to be rolled over into other non-qualified, qualified, or IRA plans.
- Raising the age for required minimum distributions (RMDs) and enabling workers over the age of 50 to make extra contributions to their retirement plans beyond the standard limitations.
- Introducing a new 10% tax rate. The new 10% tax rate was indexed to the old 15% tax level. Existing tax brackets of 28%, 31%, 36%, and 39.6% have been decreased to 25%, 28%, 33%, and 35%.
- The per-child tax credit will be increased from $500 to $1,000.
- Eliminating the marriage penalty by increasing the standard deduction for a married couple filing jointly, hence removing married couples’ tax burden.
The tax cuts were implemented to provide people more discretionary income in the belief that the extra monies would boost consumption and pump money into the economy. Many taxpayers, however, saved or invested their refunds instead.
The issue was that many of the tax incentives benefited the top 20% of income earners more than the middle and lower income earners.
The Bush Tax Cuts for Businesses
The second tax code amendment was passed in 2003. It was launched as the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) to give a series of tax breaks for companies and to expedite the tax adjustments established in the 2001 EGTRRA. JGTRRA aims to boost the economy’s recovery by placing more money in the wallets of firms and investors and boosting investment in stock markets.
Specifically, the JGTRRA:
- Long-term capital gains taxes were reduced from 8% and 10% to 5%, respectively, and from 20% to 15%. Capital gains tax was decreased to zero for taxpayers in the 10% to 15% tax rates in 2008.
- Reduced taxes on qualifying dividends (including bank dividends, REIT income, and income from non-foreign firms) to long-term capital gains levels from ordinary income tax levels.
- Many of the tax elements of EGTRRA that were supposed to be brought in gradually were accelerated. For example, under EGTRRA, the new 10% marginal tax rate was to be increased to $7,000 and $14,000 for single taxpayers and married couples filing jointly in 2008. The JGTRRA expansion amounts went into effect in 2003 rather than 2008.
- Increased the amount of income that is excluded from the Alternative Minimum Tax (AMT) to enable more people to pay tax at the standard income tax rate rather than the higher minimum tax rates.
- The maximum amount that taxpayers may immediately deduct from the cost of a tangible business property put in operation during the tax year has been raised from $25,000 to $100,000.
The Extension of the Bush Tax Cuts
The Bush tax cuts were set to expire in 2010 and 2008, respectively, under EGTRRA and JGTRRA. However, due to the 2008 economic downturn, the tax cuts were extended until 2012.
Indeed, the tax cuts had been in place for so long that they started to seem permanent, and citizens and politicians alike expressed outrage as their expiry date neared. Despite the fact that the recession had formally ended, many Americans were still feeling the consequences of it.
With a fiscal cliff still hanging over the economy, President Barack Obama signed the American Taxpayer Relief Act of 2012, which preserved the Bush tax cuts for single taxpayers earning less than $400,000 and married couples earning less than $450,000.
Those who urged that the Bush tax cuts should be allowed to expire as planned stated that the government needed the increased tax income to cover its large budget deficits. Those who called for extending or making permanent the Bush tax cuts stated that higher taxes impede economic development and undermine entrepreneurship and work incentives.
The Downside of the Bush Tax Cuts
The Bush tax cuts, along with war expenditures in Iraq, resulted in a budget deficit due to a decrease in tax revenues collected by the government. In actuality, the fiscal year 2009 budget deficit was $1.4 trillion, the highest deficit compared to the GDP since World War II.
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