Bush Tax Cuts: Definition & Impact

KEY TAKEAWAYS

• President George W. Bush passed a variety of short-term tax relief measures in 2001 and 2003 that are commonly known as the Bush tax cuts.
• In order to help the economy recover from the dot-com bubble burst-induced recession, EGTRRA (2001) was put into place.
• JGTRRA (2003) accelerated the tax adjustments passed by EGTRRA and granted a number of tax cuts for enterprises.
• Both tax cuts were set to expire in 2010 and 2008. However, due to the 2008 recession, they were postponed until 2012.

What Are Bush Tax Cuts?

The Bush tax cuts were a set of short-term income tax relief laws that President George W. Bush signed into law in 2001 and 2003. They were made possible by two pieces of legislation, the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) and the Economic Growth and Tax Relief Reconciliation Act (EGTRRA).

The Bush tax cuts featured two distinct laws that were approved to lower income tax brackets for people and companies in 2001 and 2003, respectively. They also created a new 10% income tax bracket.

The reforms reduced the capital gains tax rate and the tax rate on dividend income to 15% for everyone, as well as the marriage penalty, and boosted the child tax credit to $1,000.

Additionally, they phased out personal exemptions for people with higher incomes and itemized deductions, among other things. They also introduced new limitations on estate taxes.

EGTRRA – Bush Tax Cuts for Families

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA), formally known as the first tax code amendment, was an income tax relief measure designed to boost the economy during the recession that followed the dot-com bubble burst—the abrupt collapse of the internet and digital technology stocks and the loss of trillions in investment capital.

The following were some advantages of the EGTRRA tax reductions:

• Reducing the top rate for estate, gift, and generation-skipping transfer taxes from 55% to 50% in 2002, with a further reduction of 1% per year through 2007.
• Removing the time restriction on tax-deductible student loan interest deductions.
• Enabling the transfer of assets from non-qualifying 401(a), tax-sheltered 403(b), and deferred compensation 457(b) plans to IRAs, qualified plans, or other non-qualified plans.
• Raising the age at which required minimum distributions (RMDs) are due and enabling workers over the age of 50 to contribute more to their retirement plans than was previously permitted.
• Establishing a new 10% income tax bracket. Indexed to the new 10% tax rate was the 15% tax bracket. Tax rates that were previously 28%, 31%, 36%, and 39.6% were instead reduced to 25%, 28%, 33%, and 35%, respectively.
• The per-child tax credit was raised from $500 to $1,000.
• By doubling the standard deduction for a married couple filing jointly, the marriage penalty is eliminated, along with the associated tax liability.

The tax reductions were implemented to provide families with more disposable income in anticipation that the extra monies would encourage consumption and boost the economy. However, a lot of taxpayers choose to save or invest  their refunds.

Another issue was that many tax advantages benefited the top 20% of incomes more than middle- and lower-income earners, with the latter group suffering from a disproportionately smaller gain.

JGTRRA – Bush Tax Cuts for Businesses

In 2003, the second amendment to the tax code came into effect. The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) was introduced in order to speed up the tax adjustments made by the 2001 EGTRRA while also offering a number of tax breaks for businesses. JGTRRA sought to boost the economy’s recovery by putting more money in the hands of firms and investors and promoting stock market investment.

In particular, the JGTRRA: 

• Tax on long-term capital gains was decreased from 20% to 15% and from 8% and 10% to 5%. Capital gains tax was eliminated for taxpayers in the 10% to 15% income tax bracket in 2008
• Certain qualified dividends, such as bank dividends, and dividends from real estate investment trusts (REITs) were to be taxed at capital gain rates. 
• Several of the tax elements of EGTRRA that were supposed to be gradually phased in have been accelerated. For instance, the EGTRRA required the new 10% marginal tax bracket for single taxpayers and married couples filing jointly to increase to $7,000 and $14,000, respectively, in 2008. When it came to JGTRRA, the expansion amounts were implemented in 2003 rather than 2008.
• To enable more people to pay tax at the standard income tax rate rather than the higher minimum tax rates, the Alternative Minimum Tax (AMT) exemption level was raised.
• Increased from $25,000 to $100,000 the maximum amount that taxpayers may immediately deduct. This is from the cost of a tangible business asset used in the course of the tax year.

Extension for Bush Tax Cuts

Both EGTRRA and JGTRRA were to expire in 2010 and 2008, respectively. However, the tax cuts were extended to 2012 in the wake of the 2008 economic slump.

In fact, the tax breaks had been in place for so long that it felt like they would always be there. As the deadline for their expiration drew near, both people and politicians cried foul. Although the recession had officially ended, its consequences were still being felt by many Americans.

 President Barack Obama signed the American Taxpayer Relief Act of 2012, which included the Bush tax cuts for individuals with incomes under $400,000 and married couples with incomes under $450,000.

Economic Impacts of the Bush Tax Cuts

The cumulative effect of the cuts was an increase in debt without appreciably enhancing growth. The after-tax income of the richest 1% of households increased by 6.7%, while the gains for the bottom fifth of households were only 1%.

There is no proof, according to research, that tax cuts have any effect on the spending patterns of high-income taxpayers. It has been calculated that maintaining the Bush tax cuts will cost $4.6 trillion from 2012 to 2021. The Bush tax cuts would only boost growth enough to offset 10% of their long-term costs.

Pitfalls of the Bush Tax Cuts

Due to the decrease in tax revenues, the government collected as a result of the Bush tax cuts and the expenditures for the Iraq war, there was a budget deficit. In actuality, the $1.4 trillion budget deficit for the 2009 fiscal year was one of the highest deficits since the end of World War II.

Summary

President George W. Bush enacted two revisions to the tax code during his first term, which are known as the Bush tax cuts. In 2001 and 2003, respectively, Congress passed tax cuts for investors and households.

They were planned to run out at the conclusion of 2010. Many of the tax measures are still in place and have an ongoing impact on the economy. .

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.