Specifically, EGTRRA:
Increased the tax-deductible contributions people could make to their IRA accounts. Doubled the child tax credit from $500 to $1,000. Expanded the Earned Income Tax Credit. Provided greater tax deductions for education expenses and savings. Reduced the gift tax. Provided relief from the Alternative Minimum Tax. Phased-out the estate and generation-skipping transfer taxes so that they were eliminated in 2010. Reduced the “marriage penalty” by doubling the standard deduction for married couples. It also doubled the income threshold for married couples in the 15% tax bracket. Those measures made the tax rates equivalent to what the couples would have had if they were single. Eliminated the planned phase-out of personal exemptions for those earning over $150,000 a year. Eliminated the phase-down of itemized deductions for those earning over $100,000 a year. Reduced tax rates as follows: 39.6% to 35%, 36% to 33%, 31% to 28%, and 28% to 25%. It created a new 10% rate for some of those who previously paid 15%.
Pros & Cons
Pros
EGTRRA saved taxpayers $1.35 trillion over a 10-year period. The Urban Institute said the tax cuts benefited families with children and those with incomes over $200,000, the most. Since it was retroactive to the beginning of 2001, the Internal Revenue Service mailed out refund checks to taxpayers. Receiving a check in the mail from the federal government made people feel they were getting free money.
Cons
EGTRRA didn’t end the 2001 recession for several reasons. First, the tax cuts were phased in through 2009, too slowly to boost the economy. Economic growth was 1.0% in 2001 and only increased to 1.7% in 2002, and 2.9% in 2003. To solve this, Congress passed the Jobs and Growth Tax Relief Reconciliation Act in 2003 to speed up the tax cuts. Second, many people saved their rebates instead of spending them. Those in the high-income tax brackets already had enough disposable income to cover their consumer spending. They used the extra tax savings to boost their investments. In the long run, EGTRRA hurt the economy by dramatically decreasing government revenues. That increased each year’s budget deficit and thereby the U.S. debt. This debt puts downward pressure on the value of the dollar, which started to decline in 2002.
Why EGTRRA Hurt the Economy
Both Bush tax cuts should have been reversed in 2005. The economy had recovered enough. Gross domestic product growth was 3.8% in 2004 and 3.5% in 2005. That’s faster than the healthy growth rate of 2% to 3%. If the tax cuts had been reversed, the higher taxes would have slowed spending. That would have helped prevent the housing boom that ultimately led to the financial crisis of 2008. Instead of reversing the cuts when the economy improves, Congress designed EGTRRA and JGTRRA to expire in 2010. By then, the economy was suffering from the Great Recession. No elected official would rescind tax cuts when economic growth was still tenuous. At the same time, Congress faced a record $13 trillion debt. It was caught between the rock of recession and the hard place of fiscal responsibility. In the fall midterm elections of 2010, Republicans gained the majority in the House of Representatives. They wanted to extend EGTRRA for two years. Democrats agreed except they didn’t want to prolong the tax breaks for individuals earning $200,000 or more and for families earning equal to or more than $250,000. The Obama tax cuts of 2010 extended most of the Bush tax cuts. It reinstated the estate tax, although at a lower rate. Obama also extended unemployment benefits and cut payroll taxes. In 2013, the cuts were made permanent as part of the deal in 2012 to avoid the fiscal cliff. Among other changes, it restored the top tax bracket to 39.6%. EGTRRA was one of the reasons the debt doubled during President Bush’s administration. It increased by almost $6 trillion. Other reasons included lower tax receipts from the recession, the bank bailout bill, and increased military spending for the War on Terror. In the long run, high debt puts downward pressure on the value of the dollar. A devalued dollar raises the cost of imports and can trigger inflation.
