What to Do About the Bush Tax Cuts

Following news coverage can be easy. Understanding some of the terms it uses, less so. In our Flashcard series, The Atlantic explains ideas you may read about but never see spelled out. In this installment, we dig into the case for and against the Bush tax cuts.
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The News

The 2001 and 2003 tax cuts signed by President George W. Bush are scheduled to expire in the final seconds of this year. President Barack Obama promised to extend the cuts for 95% of American families who make less than $250,000 a year. But the recession and the weak recovery has emboldened two groups: Republicans who want to extend the whole thing and economists who want to kill it for good.

It seems that everybody in the country has a strong opinion about what to do with the Bush tax cuts. But what do they actually do? Whom do they benefit? And what should we do about them?

The Gist

What we now call the "Bush Tax Cuts" were two separate bills. One passed with bipartisan Senate support in the mild downturn of 2001. The second scraped only with the tie-breaking vote of Vice President Dick Cheney in 2003.

The laws made deep changes to the U.S. tax code. Most commentators focus on how they helped the "rich" -- by slashing the rate on income and capital gains, and by "patching" the Alternative Minimum Tax to spare upper middle class families from paying more under a parallel tax code.

But in reality, they did much more. They cut every income tax rate by three percent. They carved out a new bottom bracket at 10 percent. They cut, and cut, and finally killed (for one year only) the estate tax. They doubled the child credit, reduced the marriage penalty, and expanded tax incentives for education. If the tax cuts expired in December, average tax rates would rise across the board, costing the median tax payer more than $1,000.

The following charts from the Tax Policy Center show how the death of the Bush tax cuts would increase your tax burden. In the first image, middle class relief is marked in green. In the second image, Obama's plan would rescind most of the policies colored in blue.



The Debate

The expiration of the Bush tax cuts was always going to be controversial, but a high deficit and weak economy have made the issue downright explosive. Extend the full tax cuts, and you increase our dangerous debt by as much as $3 trillion over ten years. Eliminate them, and you could pull the rug out from under our wobbly economy. What's a Congress to do?

Extend the whole dang thing, say Republicans and some conservative economists. They cite three reasons. (1) Raising taxes on anybody today is like stomach-punching someone suffering an asthma attack. (2) Lower taxes are inherently better for growth because income and investment taxes discourage income and investment. (3) Even with the Bush tax cuts, government revenue is still scheduled to rise above its historical average. That means our deficit problem is 100 percent a spending problem.

The Let-It-Die brigade is a motley crew, including Alan Greenspan and Fareed Zakaria. They also make three points. (1) We didn't need the Bush tax cuts to grow in the 1990s and we don't need them in the next decade. (2) They are an overwhelming source of America's deficit problem, costing us trillions of dollars we don't have. (3) We need comprehensive tax reform, not a hasty tax extension.

This last argument is the most convincing. The president should extend the Bush tax cuts -- yes, the whole dang thing -- for a year to temporarily silence his critics. Then he should use 2011 to knock it down and build a tax system that's right for the next decade. Working off a bipartisan plan, real tax reform would simplify the income brackets and eliminate the multitude of deductions and exemptions that distort the economy with bad incentives and leave hundreds of billions of dollars on the ground.

A new tax code needs time. The president should buy some by extending the entire law. Even if it costs us $70 billion in foregone revenue, it's the smartest investment he could make.