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The Truth About the 2001-2003 Tax Cuts

Posted By Guinevere Nell On August 4, 2010 @ 1:00 pm In Economics | Comments Disabled

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In the battle over the extension of the 2001/2003 tax cuts [2], a lot of myths about the tax cuts [3] are being perpetuated. One of the common myths is that the Bush tax cuts disproportionately favored the wealthy, shifted the burden of taxes from the rich to the middle class, and made our tax system less progressive than most wealthy nations.

First, although there was a slight shift of burden to the middle class immediately after the 2001 tax cuts were passed [4], as the higher earners (and businesses) grew their savings, investments, and wage funds, their share of the tax burden rose. By 2007, the highest earners were paying a significantly larger share than they had previously [5], and today the tax burden of top 1 percent exceeds that of bottom 95 percent [6].

Does that sound unusually progressive? Well, it is. The U.S. federal tax system is more progressive than any other OECD country, by several measures [7]. (And if you count state taxes in the U.S. and the corresponding value added tax in the European countries, it would only increase this difference). It isn’t only that the wealthy in America pay more taxes because they earn more money. Compared to the relative income they earn, the top 10 percent pay a higher relative share of taxes than their European counterparts.

The argument that the top earners are not paying their “fair share,” or that the 2001/2003 tax cuts gave the wealthy in America a free ride, simply does not hold water. So, if moral reasons come up short, what about economic ones? It is true that the deficit is at unsustainable levels—but this is due to outrageous spending, like the failed stimulus package [8] and the harmful bailouts. The deficit is caused by spending [9], not by tax cuts [10].

Tax hikes would also harm the current economic recovery. The majority of those filing in the upper income brackets have small business income or investments. Increasing taxes on business could cost the economy dearly. Former Congressional Budget Office director Douglas Holtz-Eakin calculates that an increase in the top rate could reduce small business hiring by 18 percent [11]. The majority of economists agree that raising taxes at this time is the worst possible policy. Myths aside, the Bush tax cuts should be extended in full, even for “the rich.”


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/08/04/the-truth-about-the-2001-2003-tax-cuts/

URLs in this post:

[1] Image: http://www.heritage.org/budgetchartbook/top10-percent-income-earners

[2] battle over the extension of the 2001/2003 tax cuts: http://thehill.com/blogs/on-the-money/domestic-taxes/112343-top-conservative-gop-unlikely-to-win-extension-of-all-bush-tax-cuts

[3] myths about the tax cuts: http://www.heritage.org/Research/Reports/2007/01/Ten-Myths-About-the-Bush-Tax-Cuts

[4] immediately after the 2001 tax cuts were passed: http://www.washingtonpost.com/wp-dyn/articles/A61178-2004Aug12.html

[5] By 2007, the highest earners were paying a significantly larger share than they had previously: http://www.washingtontimes.com/news/2010/jun/20/cbo-rich-got-richer-paid-more-taxes-under-bush/

[6] today the tax burden of top 1 percent exceeds that of bottom 95 percent: http://www.taxfoundation.org/blog/show/24944.html

[7] The U.S. federal tax system is more progressive than any other OECD country, by several measures: http://www.taxfoundation.org/blog/show/23856.html

[8] failed stimulus package: http://blog.heritage.org../2010/06/10/the-link-between-economic-freedom-opportunity-and-recovery/

[9] caused by spending: http://www.theatlantic.com/business/archive/2010/07/the-long-term-budget-problem-is-100-percent-spending/60542/

[10] not by tax cuts: http://www.heritage.org/Research/Reports/2010/08/Tax-Cuts-Are-Still-Not-Driving-the-Budget-Deficit-The-Critics-Fall-Short

[11] could reduce small business hiring by 18 percent: http://money.cnn.com/2010/07/26/news/economy/Bush_tax_cuts/

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